Скачать или смотреть Understanding Bank Failures: Is the Second Wave Beginning?

Bank failures can be a cause for concern, especially if they indicate the start of a larger trend. On November 3rd, Citizens Bank was placed into FDIC receivership, prompting questions about whether this is an isolated incident or the beginning of a second wave of bank failures. It is important to note that this Citizens Bank should not be confused with other banks of the same name. With 155 banks having "Citizens" in their name and 13 specifically called Citizens Bank, it is unlikely that your bank is the one that failed. This video will delve into the reasons behind bank failures, how banks operate, and what happens when a bank fails.

How Banks Operate:
Contrary to popular belief, banks do not simply hold onto your money when you deposit it. Instead, they use it to purchase assets, often in the form of debt instruments. This practice, known as fractional reserve banking, allows banks to keep a small fraction of deposits available for regular withdrawal requests. In normal circumstances, this system works fine. However, rising interest rates can create problems for banks that have invested heavily in debt instruments. As interest rates increase, the value of these assets decreases, leading to potential insolvency for banks.

What Happens When a Bank Fails:
When a bank fails, the FDIC steps in to protect depositors. In the case of Citizens Bank, ownership was transferred to Iowa Trust and Savings Bank. The two branches that were previously Citizens Bank will reopen as branches of Iowa Trust and Savings Bank, and customers do not need to change their banking relationship. For depositors with less than $250,000 in the failed bank, it is business as usual. The losses incurred by the bank are absorbed by the FDIC, ensuring that depositors do not suffer any financial harm.

Protecting Your Money:
To safeguard your funds and mitigate the risk of bank failures, there are several options available. Firstly, it is advisable not to keep more than $250,000 in a specific bank. This ensures that your deposits are fully insured by the FDIC. Alternatively, you can consider investing in money market funds through brokerage accounts. These funds invest in short-term US Government treasuries and offer higher returns compared to traditional bank accounts. Lastly, Treasury bills (t-bills) provide a direct loan to the US government and offer attractive interest rates. By diversifying your cash holdings across these options, you can minimize the risk of losing money in a bank failure.

The Pattern of Bank Failures:
Looking at historical data, there seems to be a pattern of bank failures following a period of normalcy. For example, the years preceding the financial crisis saw zero bank failures, followed by a significant spike in failures. Similarly, the years 2021 and 2022 also experienced zero bank failures, which could indicate a potential increase in failures in the coming years. This pattern suggests that we may see a surge in bank failures, albeit with smaller dollar amounts lost. Factors such as the consolidation of banks and the concentration of distressed assets in commercial real estate loans contribute to this trend.

Conclusion:
While the recent failure of Citizens Bank may not be indicative of a widespread banking crisis, it is essential to understand the underlying factors that contribute to bank failures. By diversifying your cash holdings and exploring alternative options such as money market funds and t-bills, you can protect your money and potentially earn higher returns. Additionally, staying informed about the state of the banking industry and potential risks can help you make informed decisions about your financial well-being.