What happens when banks starts failing?

Posted on March 17, 2023 by Romie Babraa

So many questions have been arising after looking at recent failings at SVB (Sillicon Valley Bank) and other lenders. Are we sitting at a tipping point and will there be a repeat of 2008/9 financial crises?

Let's see what we should be doing if and when a bank starts failing.

Well, it can have some serious consequences for both the bank's customers and the wider economy. Here are some of the potential outcomes:

Bankruptcy: If a bank fails to meet its financial obligations, it may be declared bankrupt. This means that it will be unable to pay its debts and will be forced to shut down.
Run on the bank: A bank failure can cause panic among its customers, who may rush to withdraw their deposits. This can lead to a "run on the bank" and make it more likely that the bank will fail.
Bailouts: Governments may step in to prevent a bank from failing, by providing financial assistance or bailing out the bank. This can be controversial, as it can be seen as rewarding bad behavior and putting taxpayer money at risk.
Contagion: If one bank fails, it can lead to a loss of confidence in the banking system as a whole. This can lead to a chain reaction of failures, as customers withdraw their deposits from other banks out of fear that they too will fail.
Economic impact: A banking crisis can have a significant impact on the wider economy. If banks are unable to lend money, it can lead to a credit crunch, making it difficult for businesses to get the financing they need to grow. This can lead to a recession or even a depression.

And is there a domino effect when banks starts failing?

Yes, there can be a domino effect when one bank starts failing. This is because banks are interconnected and rely on each other for liquidity and funding. When one bank fails, it can lead to a loss of confidence in the banking system as a whole, and customers may rush to withdraw their deposits from other banks.

This can create a liquidity crisis for other banks, making it difficult for them to meet their financial obligations. Banks may also become more cautious about lending to each other, which can further exacerbate the situation. This can lead to a credit crunch, making it difficult for businesses and consumers to access the financing they need.

In extreme cases, a banking crisis can lead to a wider economic downturn or even a recession. This is because banks play a crucial role in the economy by providing financing and credit to businesses and individuals. If banks are unable to do this, it can have a ripple effect throughout the economy.

But what to do in such sitation, as a customer, if your bank fails or about to?

If your bank is experiencing financial difficulties, it's important to take some steps to protect your money and assets. Here are some things you can do:

Don't panic: The first thing to do is to stay calm and don't panic. While a bank failure can be unsettling, it doesn't necessarily mean that you will lose all your money.
Check your deposit insurance: In many countries, banks are required to have deposit insurance to protect their customers' deposits. Check whether your deposits are covered by deposit insurance and what the coverage limits are. This will give you an idea of how much of your deposits are protected in case of a bank failure.
Keep your deposits below the coverage limit: If your deposits exceed the coverage limit, consider moving some of your money to another bank to keep it below the limit. This will ensure that all of your deposits are protected in case of a bank failure.
Monitor your accounts: Keep an eye on your accounts and monitor any changes in the bank's financial situation. If you notice any irregularities or signs of trouble, consider moving your money to another bank.
Have a backup plan: Consider having a backup plan in case your bank fails. This could include opening accounts at other banks, keeping some cash on hand, or having access to other sources of credit.
Seek professional advice: If you are concerned about your bank's financial situation, seek professional advice from a financial advisor or lawyer. They can help you understand your rights and options in case of a bank failur

Hope this helps and keep our nerves calm but it doesn't happen, as once we are in it, we can loose our sleep and mind.