The Biggest Bank Failures in US History: A Look Back and Lessons Learned

The United States has seen its fair share of bank failures throughout its history. From the Great Depression to the 2008 financial crisis, there have been numerous instances when banks have crumbled under the weight of mismanagement, economic downturns, or both. In this post, we’ll take a look at some of the largest bank failures in US history, as well as what lessons can be learned from these events.

The List of Largest Bank Failures

Here’s a quick rundown of some of the most significant bank failures in the United States, based on their assets at the time of failure, adjusted for inflation (source: Wikipedia):
Washington Mutual – Seattle, Washington – 2008 – $386 billion (inflation-adjusted)
Silicon Valley Bank – Santa Clara, California – 2023 – $209 billion
Signature Bank – New York, New York – 2023 – $118 billion
Continental Illinois National Bank and Trust – Chicago, Illinois – 1984 – $104 billion (inflation-adjusted)
First Republic Bank Corporation – Dallas, Texas – 1988 – $74 billion (inflation-adjusted)
While the reasons behind each bank’s failure may differ, there are some common threads that run through many of these cases.

Common Factors Behind Bank Failures

1. Overexposure to risky assets: Many banks have failed due to their overexposure to high-risk assets, such as subprime mortgages during the 2008 financial crisis. These risky investments can lead to significant losses when the market turns sour, putting the bank’s solvency at risk.
2. Poor risk management: In some cases, banks have failed due to inadequate risk management practices. This can involve anything from insufficient due diligence when making loans to a lack of internal controls to prevent fraud and other financial crimes.
3. Economic downturns: Banks are often vulnerable to economic downturns, as these can lead to increased loan defaults and reduced demand for their services. The Great Depression, for example, saw a wave of bank failures as people lost their jobs and struggled to repay their debts. Look at the current crisis now, and we see more failures.
4. Regulatory failures: In some instances, bank failures have been exacerbated by regulatory failures, such as insufficient oversight or inadequate capital requirements. This can allow banks to take on more risk than they can reasonably manage, ultimately leading to their downfall.

Lessons Learned from Bank Failures

There are several key lessons that can be taken away from the largest bank failures in US history:

1. Diversification is crucial for investors, diversify, diversify, diversify: Banks should maintain a diversified portfolio of assets to reduce their exposure to any single risk factor. This can help to limit the potential for catastrophic losses in the event of a market downturn. Investors can also diversify by investing in multiple banks.
2. Strong risk management practices are essential: Banks must have robust risk management practices in place to identify, measure, and mitigate the various risks they face. This includes conducting thorough due diligence on loans, monitoring credit risk, and ensuring that they maintain adequate capital reserves. Check any of the banks you invest in, and what is their track record on risk management. This can be hard as a lot of failures are often hidden!
3. Regulatory oversight is necessary: A strong regulatory framework is necessary to ensure that banks are operating in a safe and sound manner. This includes setting appropriate capital requirements, conducting regular inspections and audits, and taking swift action against banks that fail to meet these standards. Governments and Central Banks appear to go through phases of the regulation surrounding banks, it is likely to be an ongoing issue in finance!

The history of bank failures in the United States serves as a stark reminder of the potential consequences of poor risk management, overexposure to risky assets, and inadequate regulation. By learning from these past mistakes, banks and regulators alike can work together to create a more stable and resilient financial system for the future.

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