This week’s topic: Bank failures

When I was little, I had a very naive view of banks: You put your money into them for safekeeping, and when you need the money back, you can take the money out. Not bad!

At some point, my parents explained to me that actually, it’s even better than that: You put your money in the bank, and as a “thank you” for letting them hold onto your money, they give you a present, which we call “interest.”

Where did this interest come from? Well, my parents told me that rather than keep my money lying around, waiting for me to take it, the bank would lend it out to other people. So long as they charged more interest on those loans than they paid me on my savings, everyone was happy.

But wait a second: This means that at any given time, only some of the depositors’ money is actually in the bank. What happens if they all ask for it at the same time?

That’s when my parents taught me what it means to have a “run on the bank,” where a lot of customers start to withdraw their money at once. A bank can handle some percentage withdrawing their deposits, but beyond a certain point the deposits aren’t there. Which means that the first people to withdraw win, and the last people lose… well, they can lose everything.

Decades ago, the US decided to do something about this. They established the FDIC (Federal Deposit Insurance Corporation), which is a sort of bank insurance company. Every bank is required to pay FDIC. In exchange, the FDIC guarantees that anyone with up to $250k in their account will get their money, even if the bank goes insolvent. You, as a bank customers, thus don’t need to worry too much about which bank you’re at; so long as it’s FDIC insured, you’re guaranteed to get your money.

Over the last week, we’ve seen a few bank failures, the first in several years. Most spectacularly, we saw the implosion of Silicon Valley Bank. I had always heard of SVB, but given that I’m not really in the startup world, and that I live in Israel, I figured it wsa a local bank in Silicon Valley, conveniently used by a bunch of the companies based there.

Turns out, they were the bank of choice for 50 percent (!) of all venture-backed startups in the US. They were the 16th largest bank in the US (according to the Federal Reserve), with about $200b in assets. Ths isn’t a small community bank!

As of this writing, the FDIC has taken over SVB. Most interestingly, various parties (the FDIC, Federal Reserve, and US Treasury) have said that everyone will get their money back, not just those with up to $250k in deposits. That was likely a relief to the many startups that had deposited millions and billions of investments in the bank, and which were starting to worry about making payroll.

For more background on what happened with SVB, I’ll refer you to the (always amazing) Matt Levine, whose “Money Stuff” column can’t come often enough. I don’t know how he writes so much, and so insightfully, while being so funny — but he does.

Also, check out this story from This American Life in 2009, where reporter Chana Jaffe-Walt takes us through the FDIC’s takeover of a bank: https://www.thisamericanlife.org/377/scenes-from-a-recession/act-two-3. It was such a good story that I remembered it from more than a decade ago.

And if you haven’t read it? Michael Lewis’s book “The Big Short,” about the collapse of the mortgage-bond market is a fun read, and highly educational. The movie is also excellent, regardless of whether you’ve read the book.

This week, I thought that it would be fun to look at bank failures in the US — when they happen, where they happen, how big they are, and how they are resolved. Our data set sadly doesn’t include SVB, but it can give us some context for this bank failure.

Data and questions

Our data this week comes from the FDIC, which offers a complete database describing bank failures at https://banks.data.fdic.gov/docs/. We’re specifically going to look at the bank-failure data, which is at the following page:

https://banks.data.fdic.gov/explore/failures?aggReport=detail&displayFields=NAME%2CCERT%2CFIN%2CCITYST%2CFAILDATE%2CSAVR%2CRESTYPE%2CCOST%2CRESTYPE1%2CCHCLASS1%2CQBFDEP%2CQBFASSET&endFailYear=2023&sortField=FAILDATE&sortOrder=desc&startFailYear=1934

Once at this URL, you can click on the “download” button. Or you can use the following URL:

https://pfabankapi.app.cloud.gov/api/failures?fields=NAME%2CCERT%2CFIN%2CCITYST%2CFAILDATE%2CSAVR%2CRESTYPE%2CCOST%2CRESTYPE1%2CCHCLASS1%2CQBFDEP%2CQBFASSET&filters=FAILYR%3A%5B1934%20TO%202023%5D&limit=10000&react=true&sort_by=FAILDATE&sort_order=desc&subtotal_by=RESTYPE&total_fields=QBFDEP%2CQBFASSET%2CCOST&format=csv&download=true&filename=bank-data

Note that if you walk through the FDIC’s data site and go to the “assistance and failures” page, it’ll only display about 10 years’ worth of data by default. So either use the link I’ve provided here, or double check that you’re seeing all of the data, with more than 4,000 bank failures.

(And yes, I’ll admit that some of this data set is about “assistance,” rather than “failures,” but I’m just going to lump them all together under the term “failures” for the purposes of this week’s question and answers.)

When downloaded, the file comes in CSV format.

The data dictionary for the file is at https://banks.data.fdic.gov/explore/failures/help.

Our questions for this week are:

1. According to our document, how many bank failures have there been since the FDIC was opened?

2. What was the earliest failure in our data set? What is the most recent failure in our data set?

3. In which five years did the greatest number of banks fail?

4. In which three states were the greatest number of failed banks?

5. What was the average market capitalization of the banks that failed? Given a capitalization of $200b, did that make SVB above, below, or about average?

6. When was the most recent failure greater than SVB?

7. Bank failures can be resolved in several different ways. How often, historically, have we seen each resolution? Were the odds good that SVB's uninsured depositors would get their money?

8. What about bank failures in the last 25 years -- if we just look at those, do the odds change?

9. What was the mean estimated loss in bank failures? What proportion of a bank's assets did this generally involve?

The learning goals for this week include working with dates and strings. And some insights into whether people were right to panic about losing their money when SVB went under.

I’ll be back tomorrow with detailed solutions to these questions.

Reuven