When Silicon Valley Bank and Signature Bank collapsed in a matter of days, it was a stark reminder to the American people that U.S. banks do fail. More than that, while all uninsured depositors were spared in these two bank failures, that’s not always the case.

Given the media storm around this month’s bank failures, it would be fair to think that it must not happen very often. But bank failures happen nearly every year.

More than 500 banks have failed in the U.S. since the year 2000. And while not a penny of insured funds has been lost in the history of the Federal Deposit Insurance Corporation, depositors don’t always get all of their money back.

The FDIC provided Straight Arrow News with a list of 76 institutions dating back to 1993 where uninsured depositors lost money in a bank failure. Some of the total overall loses are relatively small, but some number in the millions.

When Texas-based Enloe State Bank failed on May 31, 2019, less than half a million of the more than $30 million in deposits were uninsured. The government failed to secure 61% of the uninsured deposits, totaling a customer loss of $279,560.
But when The Columbian Bank & Trust Co. failed on Aug. 22, 2008, uninsured deposits totaled more than $26 million, and 95% of uninsured deposits were lost, totaling $25,252,158 in customer funds.

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Bank Failures Happen More Than You Think. Here’s Why SVB Was Different.

When we think of bank failures, our minds often drift back to the infamous financial crisis of 2008, where big-name banks like Lehman Brothers and Washington Mutual collapsed, leaving a trail of economic devastation in their wake. However, bank failures happen more frequently than you might think, impacting smaller financial institutions as well. One such instance was the recent case of Silicon Valley Bank (SVB), which faced a severe threat to its stability but managed to weather the storm. Let’s delve into the reasons why SVB’s experience was different from typical bank failures.

To understand why SVB stood out, we must grasp the common causes of bank failures. Historically, these failures have occurred due to a variety of factors such as economic downturns, mismanagement, fraud, or unchecked lending practices. Often, banks become overexposed to risky assets, leading to massive losses that ultimately erode their capital base, leaving them unable to cover their liabilities and fulfill their regulatory obligations.

In the case of SVB, a renowned technology-focused bank, its differentiation lies in its unique business model and client base. SVB primarily caters to startups, venture capital firms, and innovation-driven companies, setting itself apart from traditional commercial banks. This focus on the technology sector played a crucial role in SVB’s resilience during turbulent times.

While the COVID-19 pandemic caused significant disruptions across industries, it also accelerated the adoption of digital technologies. SVB’s tech-centric approach positioned it to navigate the crisis smoothly. As the pandemic pushed more companies towards remote work and remote transactions, SVB’s digital infrastructure proved invaluable, ensuring uninterrupted services for its clients. This advantage shielded SVB from the worst effects of the crisis.

Another reason for SVB’s divergent path was its prudent risk management practices. The bank carefully assessed the creditworthiness of its borrowers, ensuring that loans were extended to financially stable and resilient businesses. SVB’s experience and deep understanding of the technology sector allowed it to properly assess the risks involved, reducing exposure to potentially volatile borrowers.

Moreover, SVB maintained robust relationships with its clients, often acting as a strategic advisor rather than just a financial institution. This close partnership enabled SVB to gain critical insights into its clients’ operations, needs, and financial health, thereby offering tailored solutions and support when needed.

Additionally, SVB possesses a strong regulatory framework that ensures compliance with rigorous standards. Unlike some banks that disregard regulations or take excessive risks, SVB adheres to a stringent governance structure, abiding by industry guidelines and best practices. The bank’s commitment to regulatory compliance bolsters confidence among stakeholders, promoting stability and minimizing the probability of failure.

Ultimately, the successful navigation of challenging circumstances reflects the resilience of SVB’s business model, risk management strategies, and customer-centric approach. It serves as a reminder that not all banks succumb to crises and fall into the trap of failure. While bank failures may occur more frequently than we realize, each occurrence brings forth unique elements that make it distinct from the rest.

As the banking industry continues to evolve, institutions can learn valuable lessons from SVB’s experience. By focusing on niche markets, embracing innovation, forging strong relationships with clients, and maintaining a rigorous risk management framework, banks can increase their resilience and mitigate the likelihood of failure. Perhaps SVB’s success can serve as a blueprint for others in the financial industry, encouraging the adoption of strategies that promote stability, while simultaneously embracing the winds of change.