5 “Worst” Bank Collapses in U.S. History

Bank failures are more common than people realize, and they can significantly affect the economy. During tough economic times, such as the 2008 financial crisis, bank failures tend to increase significantly. For instance: between 2008 and 2012, there were 465 bank failures in the United States, with total assets worth about $700 billion.

The Federal Deposit Insurance Corporation (FDIC), which insures deposits in US banks, typically manages failed banks and ensures that depositors are protected, but only up to a certain point typically.

Most recently, we saw three banks go down in a span of just a week, which put the spotlight back onto the financial health of banks.

Bank failures can occur for a variety of reasons, including economic downturns, fraud, mismanagement, and risky lending practices. It is also crucial to recognize that bank failures can have far-reaching consequences, such as the loss of jobs, decreased lending, and reduced confidence in the financial system. Therefore, monitoring the banking sector closely is essential to prevent and mitigate the impact of future bank failures.

To better understand the scale of bank failures in the US and the role that banks play in the broader economy and financial system, let's examine the five largest bank failures.

1. Washington Mutual Bank

Washington Mutual Bank (also known as WaMu) was one of the largest banks in the US before its collapse in September 2008. The Seattle-based bank specializes in mortgage lending and other consumer banking services.

The collapse of Washington Mutual Bank resulted in a loss of $307 billion in assets, making it the largest bank failure in US history at the time. The institution suffered a bank run, with its clients withdrawing about $17 billion in assets within ten days.

Several factors contributed to WaMu's collapse. One of the primary causes was the bank's risky lending practices, particularly in the subprime mortgage market. The bank had issued a large number of high-risk mortgages that were likely to default.

WaMu had also become heavily reliant on deposits from brokered sources, which made it more vulnerable to changes in the market. The bank's management had also been accused of engaging in fraudulent activities to inflate the bank's financial performance.

On September 25, 2008, the FDIC seized WaMu and sold its assets to JP Morgan Chase for $1.9 billion. This was done to protect depositors and prevent a broader financial crisis. The collapse of WaMu was seen as a significant event in the financial crisis of 2008 and led to increased scrutiny of banks' lending practices and financial reporting.

2. Silicon Valley Bank

Silicon Valley Bank (SVB), a bank specializing in VC funding, failed on March 10, 2023, after a massive deposit rush left it unable to keep itself afloat. Before it went bankrupt, SVB had $175 billion in deposits and $209 billion worth of assets. Reportedly 93% of deposits at SVB were not insured by the FDIC.

What happened here was SVB's client deposits soared during the pandemic — going from $60 billion at the end of 2020 to about $200 billion in 2022. The bank invested these funds in safer instruments such as bonds. However, when the Federal Reserve started raising interest rates from virtually zero to 4.58%, it reduced bond returns. It led to slower financing of startups, reducing SVB's pace of deposits.

On March 8, the bank sold $21 billion in securities for $1.8 billion in losses. This made Moody cut down the bank's credit rating, followed by several VCs withdrawing their deposits. On March 9 alone, customers tried to withdraw a record $42 billion from the bank, equivalent to one-quarter of the bank's total deposits, causing a bank run.

Sensing the need for intervention, regulators finally decided to take matters into their hands and closed down the bank. Later, the FDIC created a new bank to handle all SVBs insured deposits.

However, regulators assured depositors would have access to “all of their money.” Joe Biden's administration, too, announced the plan to support all depositors at SVB and make more capital available for other banks.

3. Signature Bank

On March 12, 2023, Signature Bank was closed by the New York State Department of Financial Services (NYDFS), which then turned over to FDIC just two days after Silicon Valley Bank entered receivership.

The sudden collapse of SVB spooked Signature Bank customers, who withdrew more than $10 billion in deposits. This led to a run on deposits that quickly led to the third-largest bank failure in US history. While depositors were to be made whole, shareholders and certain other unsecured debt holders would not be protected, said the authorities.

Signature Bank had 40 branches, assets of $110.36 billion, and deposits of $88.59 billion at the end of 2022, according to a regulatory filing. The bank was founded in 2001 as a more business-friendly alternative to big banks and had expanded to the West Coast.

Signature was actually a crypto-friendly bank that joined the industry in 2018 and helped turbocharge deposit growth in recent years. The bank created a 24/7 payments network called Signet for crypto clients that uses blockchain technology to enable real-time settlements. While the bank has been phasing out of the crypto market, it still had $16.5 billion in deposits from digital-asset-related customers.

4. Continental Illinois National Bank and Trust

Continental Illinois National Bank and Trust Company (CINB) was a large commercial bank based in Chicago, Illinois, specializing in corporate lending and other financial services. At the time of its collapse, it was one of the ten largest banks in the US, with over $40 billion in assets.

In May 1984, CINB experienced a run on deposits and was declared insolvent. The bank was subsequently taken over by the FDIC. CINB's collapse resulted in losses of billions of dollars for the FDIC.

As to what happened, several factors contributed to CINB's collapse. One of the primary causes was the bank's exposure to the energy sector, which was experiencing a major downturn at the time.

CINB had made significant loans to oil and gas companies that could not repay their debts. In addition, the bank had engaged in risky lending practices, including loans to third-world countries, which led to significant losses. CINB's management was also accused of engaging in insider lending practices, further undermining the bank's stability.

After taking control of CINB, FDIC provided $4.5 billion in assistance to help stabilize the bank. This included a direct infusion of $1.5 billion in capital and a guarantee of $3 billion in deposits. But this didn't help much, as the bank was ultimately sold to Bank of America.

5. First Republic Bank

First Republic Bank of Dallas, also known as First Republic Bank Corporation, was a commercial bank based in Dallas, Texas. It was founded in 1984 and collapsed in 1988 due to financial difficulties.

The commercial bank primarily offered traditional banking services to individuals and businesses, including loans, deposits, and checking accounts. At one point, the bank held 20% of all loans made by commercial banks in Texas.

In September 1988, First Republic Bank of Dallas experienced a run on deposits and was declared insolvent. One of the primary causes of its collapse was the bank's rapid expansion, which led to significant loan losses and increased operational costs.

Besides, the bank had also engaged in risky lending practices, including lending to real estate developers and investing in high-risk assets. In addition, the bank's management had been involved in fraudulent activities to inflate the bank's financial performance.

At last, the FDIC took control of First Republic Bank of Dallas and provided assistance to help stabilize the bank. However, the FDIC suffered $4 billion in estimated costs due to the failure of the insured subsidiaries of the bank. Later, these 40 bank subsidiaries were closed and sold to NCNB Corporation, North Carolina.

Final Word

As we saw, bank runs happen from time to time due to poor management, economic downturns, regulatory issues, fraud, embezzlement, or cybersecurity breaches. The recent failure of SVB has raised renewed concerns about banking practices.

There's also the question of what happens to customers' money when a bank has to close down. The majority of banks are insured by the FDIC, which protects consumers' money by selling the bank to another financial institution or paying depositors directly up to $250k.

If your bank is sold, your money is typically available in your new account within a few business days, with your terms and conditions staying the same. However, if a large number of depositors are affected by the bank's failure, it may take longer before you can get your hands on your funds.

But what can you do to protect yourself from the risks of bank failure? It's recommended to spread your money out across several banks. Choosing a well-regulated and financially sound bank is also important, as is monitoring your account activity and statements regularly to guard against errors or fraud.

On top of it all, stay informed by keeping up to date on financial news and trends, which can help you spot warning signs of instability at your bank. Overall, it's important to be prepared and protect your money in case of bank failure.