Broker Check
Should we be worried about the 2023 Bank Failures?

Should we be worried about the 2023 Bank Failures?

May 22, 2023

If you watch the news (I typically do not), you may have seen coverage on a few banks failing due to a multitude of reasons. It has driven fears that we are experiencing a financial meltdown similar in nature to what we saw in 2008. I am not here to tell you that this is absolutely false because, well, I don't have a crystal ball. I am here to provide some facts that many news outlets leave out. I think this is an opportune time to remind you that it is not the goal of news outlets to provide you with heartwarming news coverage. They aim to draw in viewers. Their revenue sources are largely due to advertising and by having more viewers they can charge more for advertising. What is one of the easiest ways to keep people returning to learn more? By initiating a fear response in those watching.

In recent years, we have all been dealing with the highest inflation rates in decades and the Fed has responded with an increase in interest rates in an effort to reverse this. Before the large rate increases, some banks had made some investment decisions that were risky in nature and when interest rates rose, it put them into a tough situation. Bank runs complicated the situation. 

One thing to address that some may not be aware of. The Federal Deposit Insurance Corporation (FDIC) insures all bank deposits up to $250,000. The FDIC was created during the Great Depression in order to restore trust in the banking system. This means that even if your bank fails, your deposits are guaranteed by the FDIC so you don't have to worry about losing your money. 

Another point to bring up is the differences between 2008 and 2023. The failures in 2008 were largely due to poor underwriting on mortgage loans and subprime assets. 2023 failures have been at least partially causes by bad decision making in investing bank assets and interest rates increases. 

I have a background in data science, (You may be wondering and yes, I am a nerd. Data science and finance are my jams.) I always find that visualizations do a better job of explaining certain data than anything else. The visual showing bank failures by volume by year adjusted for inflation does just that. 

I would feel remiss if I didn't mention that three of the largest four bank failures in history have happened this year so it is not all sunshine and rainbows. Do your due diligence on where you keep your money and do the same if you decide to invest into stock at any banking institutions. There is always risk to investing, even at a bank but the question I would pose is, "do you think the government will allow our banks to fail?" For my first witness I would call to the stand the 2008 Banking Crisis. 

Stay disciplined.