SVB Bank and Signature Bank failed this week and were bailed out. Mark explains why the banks failed and why it was bound to happen. The minor issue is that the total FDIC bailout fund is actually smaller than either one of the banks.

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In financial systems, bank failures can be devastating, and there are different reasons they happen. One way for banks to fail is when depositors run on the bank. When people hear about rumors or doubts that their bank might be in trouble, they might go and take out their money as quickly as possible. This can then trigger a collapse of the bank, further worsening the situation.

Banks can also fail because of insufficient funds. When a bank takes out more loans than it can actually repay, the bank might not have enough funds to deal with interest payments or even to pay back the initial loan. For instance, if a bank invests heavily in real estate properties that lose their value and have few buyers, the bank might not recover the money, and the bank’s reserves might diminish.

Bank runs have become a historical feature of financial crises. In the late 1800s and early 1900s, bank runs were common in the United States. Since the Federal Deposit Insurance Corporation was created in 1933, the government has stepped in to guarantee deposits, ensuring that if a bank fails, depositors will be compensated. However, this does not guarantee that bank runs won’t happen.

The recent development of new technologies and financial instruments has brought new challenges for banks and regulators. The 2008 financial crisis highlighted the importance of monitoring the financial system in terms of assessing the potential risks faced by banks. The subprime mortgage crisis showed that banks had engaged in unethical and risky lending practices, which led to an increase in nonperforming loans.

Financial regulators across the globe are now working to prevent bank failures by constantly monitoring the financial systems they oversee. The Basel Committee on Banking Supervision, for example, has issued a set of guidelines for banking regulations, aimed at ensuring that banks operate in a responsible and sustainable way. The guidelines require banks to have sufficient capital, to adopt risk management policies, and to ensure transparency.

In conclusion, bank failures can be caused by various factors, including liquidity problems, risky investments, and market shifts. Bank runs are one of the most hazardous situations that banks can face since they can propagate to other banks and contribute to a wider financial crisis. Nonetheless, experience shows that regulators have some measures in place to protect depositors and clients, and that financial institutions might take steps towards more accountability. Nevertheless, economic actors need to remain aware of the risks involved in operating with banks, financial intermediation, and the overall functioning of financial markets.