A Brief History of U.S. Bank Failures

For a relatively young country, the United States has a surprisingly long history of economic turmoil. From the Panic of 1819 to the recent pandemic, several major economic events have caused banks to fail at high rates.

In just two and a half centuries, the U.S. has seen many economic panics that have resulted in runs on banks and bank collapses. Although the failures of Signature and Silicon Valley Banks are still fresh in our minds, it makes sense to start at the beginning.

The Panic of 1819

The legacy of bank failures in the U.S. begins in 1819 – just over 40 years after the Declaration of Independence was signed. At this time, the conclusion of the Napoleonic Wars brought global market adjustments that would toss the U.S. into its first of many financial crises.

Reduced Demand and Rampant Speculation Hurt the Economy

England and France had been fighting for centuries, so the U.S. reaped the benefits by supplying agricultural products to both feuding countries. When they stopped fighting, the demand for U.S. products tumbled. Around the same time, rampant speculation in public lands fueled by loose issuance of paper currency drove the economy into a tailspin that persisted through 1821.

Economic Turmoil Led to Bank Runs and Failures

During this crisis, the Second Bank of the United States [SBUS] – the successor to the First Bank of the U.S. – was heavily impacted and began reducing the credit it made available to state-chartered banks. Without this flow of funds, state-chartered banks began to collapse.

Individuals and Businesses Lost Their Savings

There was not a government agency tasked with protecting deposits during this time. Therefore, bank customers lost their savings when the financial institution holding them failed. This extreme risk of losses led to bank runs, where individuals and businesses rushed to be first in line to withdraw their funds from struggling banks. In turn, these bank runs led to even more failures.

Despite the government’s efforts to curtail the damage, many farmers lost everything. This crisis led to several state-chartered bank failures and paved the way for Andrew Jackson to close the SBUS in 1833.

The Panic of 1837

The financial crisis of 1837 began a recession that lasted until the mid-1840s. Some of the issues that are thought to have caused this panic were speculative lending practices in western states, a sharp decline in cotton prices, and a land price bubble. Andrew Jackson’s financial policies are also considered a major contributing factor to this crisis.

During this time, 343 out of 850 U.S. banks closed entirely. In addition, 62 banks partially failed, and numerous state banks were stressed to a point where the state banking system never fully recovered. Without a government agency to protect deposits, many Americans lost their life savings.

The Panic of 1873

Like the prior crises, the Panic of 1873 was greatly impacted by rampant speculation – this time in railroads rather than land. Around the same time, both Germany and the United States were also demonetizing silver. Both of these factors are believed to have contributed to excessive inflation and high interest rates.

Further complicating the economic situation, the U.S. economy had arguably over expanded after the conclusion of the Civil War. Additionally, major fires in Chicago (1871) and Boston (1872) strained bank reserves leading into the crisis – creating a situation that was likely to implode.

One Large Bank Failure Spurred Bank Runs

The final straw came in September of 1873 when Jay Cooke & Company [JCC] – one of the largest banks in New York City at the time – began having issues marketing railway bonds. A mass sell-off of European interests in American railroads flooded the market with available bonds, and JCC could not recoup their investment in the industry.

On September 18, 1873, JCC declared bankruptcy. Depositors across the country justifiably panicked after seeing such a large bank collapse. Like previous bank runs, they rushed to withdraw their funds from other banks.

A String of Bank Failures Impacted the Entire Financial System

Bank runs, fueled by fear and genuine economic worries, led to a string of more than 100 bank failures. The crisis was so pervasive that the New York Stock Exchange suspended trading for the first time in history and the United States entered its first great depression. This period was later dubbed the “Long Depression” after the incidents of 1929 took its original name.

Once again, no government agency had been created to protect depositors from bank failure at this time. Consequently, many Americans lost everything.

The Panic of 1907

Just a few decades after the Long Depression, an even deeper economic contraction occurred. It began in 1907 when two speculators – F. Augustus Heinze and Charles W. Morse – attempted to corner the stock of United Copper.

Risky Decisions Undermined Trust in Impacted Banks

Heinze and Morse failed in their risky attempt and suffered major losses. News of their failure spread quickly, and Americans rapidly withdrew funds from banks associated with these two men.

Within a few days, bank runs led the New York Clearing House to announce that Heinze member banks – such as the Mercantile National Bank – had been deemed insolvent. Heinze was forced to resign his position as president of the bank bearing his name, which intensified the bank runs. However, the New York Clearing House came to the rescue and offered these banks loans to make sure they could meet their depositors’ withdrawals.

The Panic Spread to Trust Companies

While the runs on the Heinze banks were effectively stopped by the emergency loans, the contagion spread to trust companies. These trust companies have many parallels with the shadow banks of today.

Another bank run on Knickerbocker Trust – which had been associated with Morse – occurred in October. The company was temporarily saved by a loan from the National Bank of Commerce. However, this time a loan was not enough to stop the run and Knickerbocker Trust failed later that month.

Reactions To the Crisis Set the Standard for Future Financial Regulation

The failure of Knickerbocker kicked off a run on New York based financial institutions. To combat these bank runs, the New York Clearing House Committee met and formed a panel to facilitate the issuance of clearing-house loan certificates. These certificates were the predecessors to the discount window loan system that is still operated by the Federal Reserve today. In fact, the effects of this crisis and the steps taken to mitigate it formed the intellectual basis for the Federal Reserve Bank.

The Great Depression: Stock Market Crash of 1929

The Great Depression officially began with the stock market crash on ‘Black Tuesday,’ October 29, 1929. Leading up to this crash, a wide range of factors came together to create a perfect storm of economic turmoil.

Speculation And Mistrust Led to Devastating Economic Turmoil

Like previous economic crises, wild speculation during the ‘roaring twenties’ was a contributing factor to this collapse. Unemployment was already growing before the panic, but stock prices continued to rise, buoyed by a continuing influx of cash from speculators. In addition, many companies were less than honest with their investors about their financials, so the speculators were often acting on bad information.

Bank Runs Across the Country Led to Mass Failures

After the stock market crash revealed the massive fissures in the American financial system, the U.S. began experiencing bank runs which led to a massive wave of bank failures. The first of those bank runs occurred in Nashville, Tennessee, and the contagion quickly spread to banks across the Southeast. Bank runs continued across the country throughout the following two years.

When President Roosevelt instituted a banking holiday in 1933, all banks were ordered to cease operations until they were determined solvent. This was the beginning of the end of the bank runs, but the pain was far from over. Overall, these runs, and the financial impact of the stock market crash resulted in the failure of about 9,000 banks throughout the 1930s.

Congress Established the FDIC To Protect Depositors

Bank failures during the Great Depression were so catastrophic that U.S. regulators had to take action to ensure a similar event would never happen again. Their solution was the creation of the Federal Deposit Insurance Corporation [FDIC] on June 16, 1933.

The FDIC is an independent agency of the federal government tasked with safeguarding cash for American citizens and businesses. It guarantees that deposits at member banks are safe from bank failure – up to a certain limit.

The creation of the FDIC restored faith in the U.S. banking system and continues to protect both individuals and businesses today. The FDIC now proudly states that “[s]ince FDIC insurance began in 1934, no depositor has lost a single penny of insured funds due to bank failure.”

A similar organization was formed to protect deposits at credit unions. After several changes to the program, it is now administered by the National Credit Union Administration [NCUA] and offers functionally equivalent protection to the FDIC.

Savings and Loan Crisis of the 1980’s and 1990’s

The banking industry was fairly stable during the half century following the Great Depression. Then, speculation and regulations that didn’t match market conditions spawned the Savings and Loan [S&L] crisis, beginning in the 1980s.

Savings and Loan Institutions Struggled to Attract Deposits

Heading into the crisis, ‘stagflation’ in the 1970’s had produced historically high interest rates. A new type of ‘cash-equivalent’ investment – the money market mutual fund – provided an additional avenue for individuals to take advantage of elevated interest rates.

Unfortunately, regulations at the time limited S&L’s ability to pay depositors the same amount of interest they could earn from these new mutual funds. Consequently, many S&Ls struggled to attract the deposits they needed.

Deregulation Led to Risky Business Practices

By 1982, S&Ls were losing as much as $4 billion per year after having profited strongly in 1980. That year, President Reagan signed an important piece of legislation aimed at deregulating the industry. This law eliminated the limitation on interest rates S&Ls could offer, but also relaxed many of the rules put in place to reduce risky business practices.

The result of this deregulation was speculative lending and investments that created enormous risk in the industry. When those risks did not pay off, more than 1,000 S&Ls failed, and new regulations were put in place to prevent a similar crisis in the future.

Government Insurance Protected Depositors

While the S&L Crisis was a turbulent time for U.S. financial markets, Americans could rest assured that their government-insured funds were safe. This government protection played a vital role in minimizing the impact of the crisis on depositors.

The Great Recession

In 2008, the U.S. began to experience the impacts of the greatest economic downturn since the Great Depression. There were many economic factors that combined to initiate the Great Recession. However, rampant speculation – this time in the housing markets – was again a major contributing factor.

The Subprime Mortgage Crisis Contributed to Economic Turmoil

In the early 2000s, the housing market was in a boom and mortgage lenders severely relaxed their standards for the borrowers they approved. Other financial institutions bought these “subprime” mortgages, usually in the form of mortgage-backed securities.

The housing market had begun to cool by 2007 and subprime lenders began to fail. Then, financial companies with significant investments in subprime mortgages started to follow.

The Failure of a Prominent Investment Bank Spurred a Banking Crisis

The Great Recession actually began in 2007, but it became a full-blown crisis in March 2008 when Bear Stearns began experiencing liquidity issues. Later that year, two investment banks became insolvent – Bear Stearns and Lehman Brothers. These failures sent shockwaves through financial markets and created a devastating domino effect that impacted stock markets, employment, and economic activity. This recession did not officially end until June 2009.

New Regulations Were Implemented to Protect Bank Customers

After the crisis, Congress passed regulatory reforms that included increased capital requirements and “stress tests” in the Dodd-Frank Wall Street Reform and Consumer Protection Act. These regulations were designed to ensure that banks who were “too big to fail” were well capitalized so they could weather the next crisis. Since this time, these regulations have been loosened.

Depositors Were Protected During the Recession

From 2008 through 2015, more than 500 banks failed as a result of this crisis. For comparison, in the 7 years prior to 2008 only 25 banks failed. However, due to the protection extended by the FDIC and NCUA, insured deposits were safe once again. Because of the protection afforded by the FDIC and NCUA, the only bank runs were on “shadow banks” who do not have government protection.

COVID-19 Pandemic of 2020

Periods of severe economic stress often coincide with an increased risk of bank failure and the COVID-19 pandemic was certainly stressful for both people and the economy. However, the pandemic recession was unique in many ways. For one, it was not caused by over-speculation or unsavory lending practices. Secondly, banks were strong, with rising deposits and increased oversight as a result of the regulations passed after the Great Recession.

The strength of the banking system helped to stave off the bank failures that would typically be expected during such a deep economic contraction. In addition, the unprecedented stimulus during this time led to further increases in bank deposits, rather than the rush to withdraw funds seen during previous recessions. For these reasons, only 4 banks failed in 2020 and none failed in 2021.

While only a few banks collapsed during the most recent recession, the threat of bank failures remains a key concern for companies with significant cash reserves. Fortunately, the FDIC now exists to protect business deposits.

Bank Failures in 2023 and 2024

Following the COVID-19 pandemic, inflation rose to heights that hadn’t been seen since the early 1980s. In response, the Fed implemented several interest rate hikes in rapid succession. These interest rate increases took their toll on some businesses and regional banks.

Mismanagement Of Interest Rate Risk Contributed to Two Massive Bank Collapses

Silicon Valley Bank [SVB] had invested heavily in Treasury bonds and when yields for these securities rose, their values fell dramatically. When many of the bank’s tech startup customers needed to access their funds at the same time, SVB was forced to sell their Treasuries at a significant loss. As depositors began to recognize the bank’s liquidity issues, they rushed to withdraw funds from the struggling bank.

Like with bank runs of the past, SVB was unable to recover. The bank failed in March 2023 – marking the largest bank failure since 2008 and the second largest bank failure in American history. Around the same time, Signature Bank was in a similar situation to SVB. This bank also failed, becoming the third largest U.S. bank failure of all time.

The FDIC Took Historic Action to Protect Depositors

In response to these significant failures, the FDIC took historic action to restore faith in the banking system and protected all deposits – even those above the traditional limit. However, it is important to note that the FDIC limit did not change, nor did the standard process for protecting deposits. Instead, the extended protection offered to depositors of Signature Bank and SVB was an exception to the normal operating procedure.

The Second Wave of Bank Failures

Then on May 1, First Republic Bank also collapsed. This failure supplanted SVB as the second largest bank failure in American history. This time, the FDIC facilitated the sale of the bank to J.P. Morgan Chase almost immediately and bank deposits were transferred within a business day.

Two more banks failed in 2023 – Heartland Tri-State Bank and Citizens Bank Sac City, IA. The turmoil spilled over into the new year with the failure of Republic First Bank in April 2024. In all three instances, the FDIC facilitated a quick transfer from the failed banks to solvent ones. Due to the FDIC’s swift action, depositors’ funds were preserved during the transfers and no depositor lost any insured funds.

Protecting Your Cash

As the economic situation continues to evolve, businesses should ensure their deposits are protected by FDIC or NCUA insurance. Currently, every individual and business depositor at a member financial institution is automatically insured up to $250,000. However, the $250k limit is often not enough to cover all a business’ cash.

Protection for more than $250,000

Businesses with more than $250k in cash should be careful not to keep it all at the same financial institution. The FDIC insurance limit is per ownership category at each depository institution. This means that businesses can spread their money among many different financial institutions to achieve protection for all their funds – even those above and beyond the $250k limit. However, managing multiple banking relationships creates a lot of additional work for cash managers.

Thankfully, modern financial technology [fintech] has delivered a solution. Our company, the American Deposit Management Co. [ADM], has developed proprietary fintech that spreads business cash among our network of hundreds of banks and credit unions to provide access to full FDIC and NCUA coverage. This all happens with a simple application, a single deposit, and a single unified monthly statement.

If you need extended protection for your business deposits, don’t hesitate to contact a member of our team. Our team is our secret sauce, and you’ll understand that when you work with us.

If you’re looking for more valuable insights on banking, interest rates, and effectively managing your business cash, be sure to check out our Insights page and follow us on LinkedIn, Twitter and Facebook.

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