Dramatic collapses made 2023 the biggest year ever for bank failures

December 13, 2023 9:00 PM

Before Silicon Valley Bank collapsed in March, it had been 28 months since a U.S. bank went up in smoke — the longest stretch without a failure in more than 15 years.

SVB's unexpected demise kicked off a historic year for bank failures. The banks that went under had $548.7 billion of combined assets, the largest total ever in a single year — outpacing both 1984, when Continental Illinois failed (Bank of America eventually bought the remnants), and 2008, when Washington Mutual collapsed (JPMorgan Chase purchased what was left).

San Francisco-based First Republic Bank goes down as the second-largest failure in U.S. history. Santa Clara, California-based Silicon Valley Bank follows at number three on the all-time list and New York City-based Signature Bank is the fourth-largest bank to fail.

The year also brought the demise of crypto-friendly Silvergate Bank — in what was a voluntary self-liquidation rather than a failure — and the failure of Heartland Tri-State Bank after its CEO reportedly fell victim to a crypto scam. In all, five banks failed, the most in a single year since 2017.

The failures come at a considerable cost to more than 100 surviving banks that have more than $5 billion of assets. Those larger banks will have to pay special assessments of 13.4 basis points annually to make up for a $16.3 billion hit to the Deposit Insurance Fund.

What follows is a recap of the year when bank failures roared back to bite the industry.

Silvergate Bank

Self-liquidation announced March 8

Total assets: $11.4 billion as of Dec. 31, 2022

Silvergate had been one of the go-to banks for cryptocurrency firms. But the rapid collapse of crypto exchange FTX in November 2022 led to a large outflow of deposits.

On March 1, Silvergate raised doubts about its ability to continue as a "going concern." A week later, the La Jolla, California-based bank threw in the towel, announcing that it would start winding down its operations.

The Office of the Inspector General for the Federal Reserve System later attributed Silvergate's collapse to its rapid growth in crypto deposits, as well as weaknesses in corporate governance and risk management — problems that left the bank vulnerable to the deposit flight that was ultimately its downfall.

Nearly all of Silvergate's deposits were uninsured, and the vast majority of them were noninterest bearing, according to a report by the Fed's inspector general, which also blamed the bank's collapse on its concentration of depositors in the crypto industry and its rapid growth.

"Beginning in 2013, Silvergate senior management changed the bank's strategy to focus on customers engaged in crypto activities," the Fed inspector general's office wrote in a summary of its findings. "Silvergate grew exponentially in a 5-year period, with total assets increasing from less than $1 billion in 2017 to more than $16 billion at the end of 2021."

Silicon Valley Bank

Failed on March 10

Total assets: $209 billion as of Dec. 31, 2022

The end came quickly for Silicon Valley Bank, which held a large bond portfolio that lost value after the Federal Reserve started hiking interest rates last year.

On Wednesday, March 8, the bank announced that it would take a $1.8 billion hit by selling some of the underwater bonds. It also embarked on a plan to raise $2.25 billion in capital. Depositors — including many tech companies and venture capital firms that were above deposit insurance limits — quickly headed for the exits.

On Friday, March 10, regulators shut down the tech-focused bank, citing inadequate liquidity and insolvency. Before the month ended, the Federal Deposit Insurance Corp. had brokered a deal to sell large chunks of SVB to Raleigh, North Carolina-based First Citizens BancShares. The estimated loss to the Deposit Insurance Fund was $16.1 billion.

In a post-mortem on the bank's failure, which was released in late April, the Fed took responsibility for supervisory failures. But the report, spearheaded by Vice Chair for Supervision Michael Barr, also called for tougher capital requirements, among other regulatory changes.

In July, the Fed proposed significantly higher capital requirements for some banks, especially larger ones — an idea that has sparked fierce backlash from the banking industry.

Angus Mordant/Bloomberg

Signature Bank

Failed on March 12

Total assets: $110.4 billion as of Dec. 31, 2022

Signature failed just two days after Silicon Valley Bank went down. It, too, had suffered a run on deposits.

The failure was announced shortly before Asian markets opened on a Monday morning, as panic was spreading in the wake of SVB's collapse.

U.S. regulators issued a systemic risk exception to protect uninsured deposits at both SVB and Signature — a controversial decision that sparked debate about whether and how deposit insurance limits should be reformed.

And the regulators announced the creation of a new lending facility that gave banks the ability to access par-value liquidity by pledging underwater securities as collateral.

A week later, New York Community Bancorp agreed to buy much of the remains of Signature from the FDIC. The agency eventually estimated the loss to the Deposit Insurance Fund to be approximately $2.4 billion.

Signature had been known as a bank that was friendly to the cryptocurrency industry. Amid the market panic of March 2023, that proximity contributed to Signature's demise, according to a report by the FDIC's office of inspector general.

Even though Signature's business model differed from Silvergate's, investors saw the New York-based depository as a "crypto bank," an official from the New York State Department of Financial Services told investigators.

In addition, like SVB, Signature had a significant concentration in uninsured deposits, the FDIC inspector general's report found.

The IG's report blamed Signature's failure on company executives' prioritization of rapid growth over sound risk management practices. It also found that the bank's contingency funding mechanisms were insufficient, which proved decisive amid a run on deposits.

The FDIC also received some blame. The inspector general's report noted that the agency had downgraded Signature's liquidity rating, but found that it missed opportunities to lower the bank's management rating.

First Republic Bank

Failed on May 1

Total assets: $232.9 billion as of March 31, 2023

While the collapses of SVB and Signature unfolded with stunning speed, First Republic's failure was more like a slow-motion crash.

Four days after Signature's demise, and amid an exodus of funding from First Republic, 11 of the nation's largest banks pledged to provide the San Francisco bank with $30 billion of deposits. The plan didn't work.

Over the next six and a half weeks, Founder and Executive Chairman James Herbert scrambled to find a private-sector solution. But on May 1, the FDIC placed First Republic into receivership, and JPMorgan Chase agreed to acquire much of the failed bank.

The resolution of the First Republic mess essentially put an end to the springtime banking crisis. The failure resulted in an estimated loss to the Deposit Insurance Fund of $15.6 billion.

Factors that contributed to First Republic's demise included its decision to grow its mortgage portfolio by undercutting competitors on price after the Fed started raising interest rates. Later, once the market value of those loans had fallen, First Republic faced the prospect of selling mortgages at below par value to raise capital.

The bank, which catered to affluent customers, also had a concentration of deposits that exceeded the $250,000 insurance limit.

One First Republic board member, Frank Fahrenkopf Jr., attributed the bank's collapse to its Bay Area location. "If our bank was headquartered in Reno, Nevada, rather than San Francisco, so close to Silicon Valley Bank, this probably wouldn't have happened," Fahrenkopf told American Banker in May.

Heartland Tri-State Bank

Failed on July 28

Total assets: $139.4 million as of March 31, 2023

The banks that failed later in the year were much smaller than the three regionals that tumbled in the spring. But the collapse of Heartland Tri-State in Elkhart, Kansas, was still marked by drama.

The Kansas Office of the State Bank Commissioner initially said that Heartland Tri-State "became insolvent due to an isolated event," which sparked speculation about what might have happened.

Days later, Kansas Banking Commissioner David Herndon said that the small bank "fell victim to a scam," but he did not elaborate on the nature of the fraud.

Then in September, Bloomberg Businessweek reported that the bank's failure was tied to the involvement of President and CEO Shan Hanes in a crypto scam. Hanes allegedly wired $12 million in connection with what he told one bank customer was a cryptocurrency investment, according to the report.

Hanes hasn't been accused of wrongdoing, and he didn't respond to Bloomberg Businessweek's questions.

Heartland Tri-State's deposits, and virtually all of its assets, were assumed by Dream First Bank in Syracuse, Kansas. The FDIC said that the failure cost the Deposit Insurance Fund $54.2 million.

Citizens Bank (of Iowa)

Failed on Nov. 3

Total assets: $60.4 million as of June 30, 2023

The failure of Citizens Bank in Sac City, Iowa, appears to be tied to its exposure to the trucking industry, which has recently been in the midst of financial turmoil.

Back in August, Citizens and its regulators entered into a consent order that focused on the bank's commercial trucking portfolio.

When the small bank failed three months later, the Iowa Division of Banking said that examiners had identified "significant loan losses that had not been previously identified."

The U.S. trucking industry has been reeling as consumers spend more on services, while inventory for overstocked retailers sits in warehouses, driving down the prices that truckers can charge.

The trucking industry's downturn, which follows a pandemic-era boom in the shipping of goods to Americans who were stuck at home, has led to concerns that banks will have to charge loans to trucking companies.

Citizens Bank's assets were purchased by Iowa Trust and Savings Bank in Emmetsburg, Iowa. The failure resulted in a $14.8 million estimated loss to the Deposit Insurance Fund.