A Brief History of U.S. Bank Failures

Bank failures are not unusual in times of economic stress. For example, critical economic events have led banks to fail at high levels since the initial financial crisis of 1819 through the COVID-19 pandemic. Fortunately, the loss associated with bank failures has not become an issue for individuals or companies that have adequate FDIC protection for their money.

History of U.S. Bank Failures

In the short time it has existed throughout its brief history; it is clear that the U.S. has seen several economic waves of Panic, which caused panics in banks and bank collapses. Even though the COVID-19 epidemic and the Great Recession of 2009 are still new to us, it is sensible to begin at the beginning.

The Panic of 1819

The story of bank failures throughout the U.S. began just over 40 years after the Declaration of Independence was signed. In 1819 after the Napoleonic Wars, global market changes sent the U.S. into its first of numerous financial crises. England and France fought for long periods while the U.S. reaped benefits in the supply of agricultural products to both countries in conflict. After the war ended in the late 1800s, the consumption of U.S. products tumbled.

To exacerbate the impact of the crisis, a flurry of speculation on public land fueled by the issuance of loose government-issued paper currency drove economic activity into a downward spiral that lasted until 1821. The Second Bank of the United States (SBUS), which was the successor to the First Bank of the U.S., was seriously affected and started to reduce the amount of credit available to banks that were chartered by the state and without this source of funding the state-chartered banks began to fail. Moreover, since the FDIC was not yet established, customers could not access their funds when the bank went under. This caused Panic in banks, which resulted in more bank failures.

Despite efforts by the government to limit the harm, the farmers suffered a lot of losses. In addition, the crisis resulted in several failed state-charted banks and opened an avenue to allow Andrew Jackson to close the SBUS in 1833.

The Panic of 1837

The financial crisis in 1837 started a recession that continued through the middle of the 1840s. A few of the factors that are believed to be the cause of this crisis were speculative lending practices in the western states, a dramatic drop in the price of cotton, and an inflationary land price. Andrew Jackson’s financial policy is a major contributing cause of the crisis.

At this time, 343 of the 885 U.S. banks closed entirely. Additionally, the banks were partially insolvent, and numerous state banks were strained to the point that the state’s banking system could not be fully restored. With no FDIC to safeguard the banks, many Americans lost their savings for the rest of their lives.

The Panic of 1873

Similar to the previous crises and others, the Panic in 1873 was greatly affected by a flurry of speculation. However, this time it was on the railroads. Germany and the United States were also demonetizing silver at the time, which may be a factor in the high inflation and the high rates of interest observed in those in the United States. It is believed that the U.S. had arguably overgrown after the end of the Civil War, and major fires in Chicago (1871) and Boston (1872) were already stretched bank reserves before this crisis, creating the conditions that were likely to collapse.

In 1873 Jay Cooke & Company JCC began to experience issues with marketing railway bonds. After investing heavily in railways, JCC became insolvent. In September 1873, the bank declared bankruptcy. This triggered a string of bank failures which caused the United States’ first great depression. The term was later changed to”the “Long Depression” because the events in 1929 were the reason for its initial name. Amid this Recession, there was a time when the New York Stock Exchange suspended trading for the first time in its history. In addition, as the stock exchange was not a member of the FDIC in place, many Americans were left with nothing.

The Panic of 1907

The year 1907 saw two speculators, F. Augustus Heinze, and Charles W. Morse, attempting to capsize the market in United Copper, but they failed and suffered significant losses. After the incident, Americans began withdrawing their cash from banks associated with the two men. In the following days, these bank crashes led the New York Clearing House to declare that Heinze bank members, like The Mercantile National Bank, had been declared insolvent. F. Augustus Heinze, the president of Heinze Bank, was forced to resign, further accelerating the bank’s run. However, Heinze Bank’s New York Clearing House came to the rescue, offering the banks loans to ensure they could meet the depositors’ demand for withdrawals which stopped the routs at their banks.

While the routs on those Heinze banks were successfully ended, the virus spread to trust businesses. At the end of October, there had been a second bank run on Knickerbocker Trust – which had been linked to Morse. Knickerbocker Trust was then temporarily saved through a National Bank of Commerce credit, but it did not last. Then, later in the month, it was revealed that the Knickerbocker Trust run intensified, resulting in their demise. The failure of Knickerbocker was the catalyst for a significant storm of New York-based financial institutions. The trust companies operating at the time in New York are in many ways similar to those of the shadow banks that we have the present.

To stop these bank run-ups And prevent this bank runs, the New York Clearing House Committee was formed, and a panel was created to help issue the clearing house loan certificate. These were the precursors to today’s discount-window loan system operated under the Federal Reserve. The effects of the crisis and the measures taken to alleviate it were the basis for the conceptual framework of this institution, the Federal Reserve Bank.

The Great Depression: Stock Market Crash of 1929

The official beginning of the Great Depression was the stock market crash on ‘Black Monday, October 29th, 1929. Also, wild speculation during the roaring 20s significantly affected the collapse. The unemployment rate was already rising before the Panic, yet the stock price continued to grow. Furthermore, many companies weren’t entirely honest with investors regarding their financials before the crisis.

In 1930 the 1930s, the U.S. began experiencing bank run-ups in response to the crisis, resulting in unprecedented bank losses. The first of these bank run-ups occurred in Nashville, Tennessee, which caused a wave of runs throughout the Southeast. It was the U.S. financial system saw more bank-related bank runs between the years 1931-1932.

When President Roosevelt declared a bank holiday in 1933, all banks were directed to shut down operations until they became solvent. This marked the beginning of the ending of the bank runs. However, the pain was not yet ending. Overall, these run-ups, as well as the financial consequences of the crash in the stock market, resulted in the collapse of around 10,000 banks during the 1930s.

This calamity resulted in the Federal Deposit Insurance Corporation (FDIC) formation on June 16th, 1933. The FDIC assured depositors that they would not lose their money to bank members in the case of a bank’s failure within the limit. Since the establishment of the FDIC banks, bank failures have ceased to pose a severe risk for our U.S. banking system. The FDIC is proud to announce it has been operating “since 1933 the last depositor has not lost any FDIC-insured dollars.”

Savings and Loan Crisis of the 1980s and 1990s

The Savings and Loan [S&L] crisis was first noticed in the 1980s and continued into the beginning of the 1990s. The trouble was caused by the speculative market and regulations which didn’t reflect the market’s conditions.

The U.S. had just weathered the stagflation in the 1970s, resulting in historically significant interest costs. In addition, the high rates and restrictions that restricted S&L’s competitiveness left them at a disadvantage. In 1982, S&Ls lost upwards of $4 billion annually after making a considerable profit in 1980. Over 1,000 S&Ls collapsed by 1989, and these failed businesses continued to fall into the 1990s. But this time, the FDIC safeguarded Americans from losing their insured funds due to bank failure.

The Great Recession

In 2008, the U.S. was experiencing the effects of the most severe economic Recession ever since Great Depression. The Recession started in 2007, but the economy was hit by a crisis in March 2008 when Bear Stearns had liquidity problems. The same year, two investment banks went insolvent, Bear Stearns and Lehman Brothers. As a result, the Recession did not end entirely until June 2009.

Numerous economic factors led to the Great Recession. However, the raging speculation and speculation – this time on the housing market was another primary reason.

Following the crisis, Congress approved regulatory reforms, which included higher capital requirements and “stress testing” as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules were designed to ensure that banks that were “too large to fail” had adequate capital so they would be prepared for the next financial crisis. Since the time of this, these regulations have been relaxed.

Between 2008 and 2015, over 500 banks were shut down in the wake of this financial crisis. However, because of the protection offered through the FDIC and NCUA, insured deposits were protected again. In comparison, during the seven years preceding 2008, only 25 banks could not survive. Due to the protection provided by NCUA and the FDIC and NCUA the only bank losses were due to “shadow banks” that do not have protection from the government.

COVID-19 Pandemic of 2020

Extreme economic stress typically coincided with an increase in the chance of bank failure, and COVID-19 was undoubtedly difficult for people and the economy. However, the pandemic recession was distinct in several ways. First, it wasn’t caused by excessive speculation or unethical lending practices. Furthermore, banks were robust and had increasing deposits and improved oversight due to new regulations enacted following the Great Recession.

The stability that the banking system was able to ward off bank collapses typically expected in severe economic contraction. Additionally, the unprecedented stimulus during this period led to even more growth in bank deposits instead of the flurry of withdrawals, as was the case during recessions of previous years. Because of this, only four banks failed in 2020, while no bank failed in 2021.

Although only a handful of banks failed during the past Recession, the risk of bank failures is an issue for businesses with large cash reserves. Fortunately, the FDIC is now in place to safeguard the deposits of companies.

Protecting Your Cash

Businesses must be on guard for the economy and ensure the security of their deposit accounts. To do this, companies must ensure that all their performances are covered through FDIC and NCUA assurance. The year 2022 will see each company and individual account holder at any member financial institution covered with a maximum of $250,000. The complete trust and credit of the U.S. Government guarantee the insurance.

Coverage for more than $250,000

If a business is fortunate enough to have more than $250k of cash should be aware of the need to store it all in one financial institution. FDIC insurance will only cover up to $250k per person per institution. This means that businesses can distribute their funds across different financial institutions, thereby gaining the protection of all their money, even over the limit of $250k. This creates lots of work managing multiple bank relationships such as statements, reconciliations, and statements.

Fortunately, the latest fintech, or financial technology, has come up with an answer. Our company is called The American Deposit Management Co. [ADM]. It has developed a unique fintech that allows companies to spread their money across our vast network of credit unions and banks for almost infinite FDIC or NCUA coverage. The best part is that it all takes an easy application, one deposit, and a month-end statement. This is what we call Marketplace Banking(TM), and this groundbreaking technology also gives you immediate liquidity and competitive rates for interest. Moreover, our clients benefit from all this while maintaining their bank accounts.

If you need more comprehensive protection for your business’s deposits, don’t hesitate to contact one of our representatives. Our team is the secret sauce, and you’ll be able to appreciate the importance of working with us.