The collapse of Silicon Valley Bank in 2023 was among the most momentous to hit the shores of the United States since the financial crisis broke out in 2008. The bank became an instant subject of interest when it suddenly collapsed, particularly for being one of the main financing institutions for technology startups, venture capital firms, and high-growth companies in Silicon Valley.

Banks can fail for a variety of different reasons, but most often it is due to a mix of bad choices and things beyond their control. Here are the 9 main reasons:

1. Bad Decisions on Loans and Investments (Risk Management)
2. Too Much of the Same Thing (Concentration Risk)
3. Not Enough Money to Cover Losses (Weak Capital)
4. Fraud or Bad Management
5. Not Being Able to Pay Depositors (Liquidity Problems)
6. Economic Downturns or Crashes
7. Regulatory Problems (Lack of Oversight)
8. Rumors or Panic (Bank Runs)
9. External Shocks (Big Unexpected Events)

Bad Loans

Banks give out loans to people and businesses. If they don’t do a good job of checking whether the borrowers can pay them back (like giving loans to people with bad credit), a lot of borrowers might default (fail to pay), and the bank loses money. Banks also invest their money in things like bonds (which are supposed to be safe). But if the investments lose value (like what happened with Silicon Valley Bank when interest rates went up), the bank can incur major losses.

Concentration Risk

If a bank puts too many of its eggs in one basket, it gets risky. For example, SVB had a lot of clients in the tech industry. When the tech market slowed down, a lot of people started pulling out money, and SVB couldn’t cover it. Imagine a bank only works with small businesses. If those businesses don’t do well, the bank is going to struggle.

Weak Capital

Banks should hold some money as a reserve or buffer against any possible losses. A bank without enough money will have problems staying afloat if it experiences difficulties. There needs to be a certain amount of money that a bank should have as a safeguard against bankruptcy.

Fraud or Bad Management

At times, people who are running the bank might make very bad decisions or even engage in acts of fraud. If they are misusing money, taking very high risks, or covering up losses, then the bank itself might collapse. Barings Bank failed in 1995 due to Nick Leeson making some unauthorized trades and losing billions. Mismanagement and a lack of checks are likely to sometimes result in failures worth billions.

Liquidity Problems

Banks operate on the premise that people will not withdraw all their money at the same time. However, if too many people want to withdraw money from the bank at once (a bank run), it might not be able to repay everyone with cash. As a result, it might be forced to fail. A large number of tech companies were withdrawing money from SVB, and they did not have an adequate supply of liquid assets.

Economic Crashes

If the economy fails, as it did in 2008, banks may be seriously affected. A market downturn might result in people not paying back loans and/or investments losing value. As a result, a bank’s financial situation might be destroyed. A serious event like an economic downturn or market collapse can result in a bank bankruptcy.

Lack of Oversight

Banks have rules they should follow as a safeguard against taking on too much risk. But if regulators, who monitor the banks, aren’t doing their job or there aren’t enough regulations, then banks might make some risky investments without knowing what could happen. As a result, in 2008, many banks were very reckless with subprime loans (bad loans), and it escaped the notice of the regulators.

Bank Runs

Once people begin to hear whispers about a bank being in trouble, they may decide to withdraw their money. A bank run will occur, and it will make a bad situation even worse. Fear alone can make a bank collapse. So, as soon as SVB made an announcement about selling assets at a loss, everyone freaked out, and people scrambled to get their money out. That made things worse.

Big Unexpected Events

At times, unexpected events, such as a global financial crisis or changes in the market, occur, and even well-managed banks will fail. When the economy crashes, people will no longer borrow money or repay loans, causing a loss for the bank. A large number of banks collapsed in 2008 due to the housing market collapse, for which they were not prepared.

Nevertheless, there are some things you can do to safeguard your own account and limit any possible harm.

Below are steps on how you should proceed once you discover that your bank is failing or encountering problems.

Stay Informed

Pay Attention to Official Announcements. If you hear about your bank’s troubles, don’t panic. Watch for official communications from the bank, regulators, or financial authorities. In the U.S., the Federal Deposit Insurance Corporation (FDIC) or the Central Bank usually steps in to manage a failing bank. If banks are in trouble, they will often make headlines. Stay up-to-date with news so you can understand what’s going on. Major announcements will tell you if your bank has been taken over by regulators or closed.

Deposit Insurance

In the U.S., the FDIC insures deposits up to $250,000 per depositor, per bank. If you have under this amount in deposits at the failing bank, you are typically protected and should not lose any money. If you have deposits over $250,000, you should assess how much of your funds are insured. If possible, you may want to move excess funds to another account or institution before things get worse. If your bank is taken over by the FDIC, they will usually ensure you can access your insured funds quickly. Before putting money in your bank, check your country’s Deposit Insurance Program. Other countries have similar insurance programs (e.g., FSCS in the UK, CDIC in Canada), so check the rules in your country to know how much of your money is protected. It’s always important to know whether your bank is FDIC-Insured or Non-Insured.

Check if your bank is FDIC-insured through the FDIC website. Go to: https://www.fdic.gov/financial-institution-directory/

If the bank is not listed in the FDIC BankFind tool, it might not be insured. In that case, you may want to reconsider holding deposits there or check with the bank directly to confirm.

Access Your Funds

Even during a bank failure, most online banking platforms will still be accessible for a while. If you can, log in and transfer your money to a different account or bank. You may be able to move funds to another financial institution before any potential freeze on withdrawals occurs. If you need cash immediately, it’s a good idea to use ATMs, as long as the bank’s ATM network is still operational. However, if a bank fails, there could be a freeze on withdrawals in some cases, so act quickly if you’re concerned.

Understand Government Process

If your bank fails, the FDIC (or relevant government authority) typically steps in as the receiver. They’ll either liquidate the bank or try to sell it to another financial institution.

What Happens to Your Accounts

For Insured Deposits: If your deposit is insured, the FDIC will usually send you a check or transfer your funds to another bank, often within a few days. In many cases, you won’t have to do anything to claim your insured deposit. For Uninsured Deposits: If you have more than $250,000 at the failed bank, the FDIC may pay out the insured portion quickly, but you’ll have to wait to see what happens with the uninsured portion. Depending on the bank’s assets and how the FDIC handles the liquidation, you may recover a portion of the remaining funds, but it’s not guaranteed. If your bank fails, the FDIC will send notices telling you what’s happening and what to do next. They’ll typically give you information on how to claim your funds and whether your accounts have been transferred to another institution. If the bank is liquidated without a buyer, the FDIC will issue you a check for your insured deposit or transfer it to another financial institution.

Contact Your New Bank (If Your Account is Transferred)

In many cases, if your bank fails, your accounts may be transferred to another bank. This is typically a smooth process, and you’ll get new account details from the new institution. The FDIC or the taking-over bank will notify you of the transfer. Once your account has been transferred:

1. Check the new bank’s terms and conditions.
2. Make sure there are no surprises with fees or service changes.
3. You may need to set up new online banking access or update automatic payments.

Long-Term Financial Plan

If you have more than $250,000 in deposits at the failing bank, you’ll need to act quickly. Transferring the excess funds to another institution or splitting your deposits among different banks can ensure future protection. Diversification of funds among different financial institutions can provide protection so one does not have all of their money at risk if one bank goes out of business. If you have investments (stocks, bonds, or retirement accounts) with the failed bank, seek the advice of a financial adviser. These types of accounts may not be insured, so it’s important to understand how your investments are affected.

Monitor Your Credit and Accounts

In case of your bank’s failure, there will be some short period while the transactions and account balances are being processed. Monitor your accounts for suspicious activity and report it to the FDIC. If you had payments or deposits tied directly to that bank, make sure they are transferred if needed to your new bank. Also, if you had loans or credit cards with the failed bank, keep an eye on those accounts and stay in contact with the bank so that payments continue without interruption.