FIN310 Class Web Page, Fall ' 23

Instructor: Maggie Foley

Jacksonville University

The Syllabus  (updated 8-18)

Term project on Bank Failure (due with final)

       Review of the Federal Reserves Supervision and Regulation of Silicon Valley Bank - April 2023 (FYI) (FYI)


Weekly SCHEDULE, LINKS, FILES and Questions


Coverage, HW, Supplements

-       Required



Chapter 1-1



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Risk Tolerance Test (FYI)


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Daily earning announcement:

IPO schedule:

Part I Review of the Financial Market


Chapter 1 Introduction 


chapter 1 ppt





Flow of funds describes the financial assets flowing from various sectors through financial intermediaries for the purpose of buying physical or financial assets.

*** Household, non-financial business, and our government


Financial institutions facilitate exchanges of funds and financial products.

*** Building blocks of a financial system. Passing and transforming funds and risks during transactions.

*** Buy and sell, receive and deliver, and create and underwrite financial products.

*** The transferring of funds and risk is thus created. Capital utilization for individual and for the whole economy is thus enhanced.


For class discussion:

1.     What is the business model of each player in the above graph?

2.     Which player is the most important one in the financial market?

3.     Can any of the players be removed from the system?

4. What might trigger the next financial crisis



Special Topic: 2023 Bank Failures


2023 Bank Failure Details

Bank Name, City, ST

Closing Date

Approx. Asset

Approx. Deposit

Acquirer & Transaction




Heartland Tri-State Bank, Elkhart, KS




Dream First Bank, National Association, to assume all of the deposits and substantially all of the assets of Heartland Tri-State Bank.


First Republic Bank, San Francisco, CA




JPMorgan Chase Bank, National Association, to assume all of the deposits and substantially all of the assets of First Republic Bank.


Signature Bank, New York, NY




On Sunday, March 12, 2023, Signature Bank, New York, NY was closed by the New York State Department of Financial Services, which appointed the FDIC as Receiver. On Sunday, March 19, 2023, FDIC entered into a purchase and assumption agreement for substantially all deposits and certain loan portfolios with Flagstar Bank, NA, Hicksville, NY, a wholly owned subsidiary of New York Community Bancorp, Inc., Westbury, NY.

Silicon Valley Bank, Santa Clara, CA




To protect depositors, on Monday, March 13, 2023, the FDIC transferred all the deposits of Silicon Valley Bank to Silicon Valley Bridge Bank, N.A. a full-service 'bridge bank' that was operated by the FDIC as it marketed the institution to potential bidders. On March 26, 2023, the FDIC entered into a purchase and assumption agreement for all deposits and loans of Silicon Valley Bridge Bank, N.A., with FirstCitizens Bank & Trust Company, Raleigh, NC. As part of this transaction Silicon Valley Bridge Bank, N.A, was placed into receivership.



The Bank Failures, Explained ppt SVB Fallout: Wall Street Debates Moral Hazard (video)

By German Lopez, March 14, 2023

The collapse of Silicon Valley Bank and others and the governments rescue over the weekend left many of us again rushing to understand the arcane details of the financial system. It can be maddeningly complex, so I want to use todays newsletter to explain some of the basics.

First, the latest: Bank stocks plummeted yesterday, hitting midsize and smaller institutions in particular. Other financial markets gyrated as well, despite U.S. policymakers emergency help for customers of the closed banks. It didnt put calm back in the system, said my colleague Maureen Farrell, who covers business.

Why does this matter to everyday Americans? After all, SVB is relatively small and most of us keep no money in it.

The short answer is the potential for wider fallout. When banks collapse, other people sometimes fear that their own banks and investments will follow. Even healthy banks dont keep enough cash on hand to pay out all depositors, so if too many people panic at once and pull out their money a classic bank run it could lead to broader financial and economic calamity. And that is what the Biden administration and the Federal Reserve are trying to stop: a financial crisis largely prompted by plunging confidence.

How did we get to this point? To answer that, I need to dive into more detail about Silicon Valley Bank.

As its name suggests, the bank portrayed itself as focused on the leading edge of technology. And it served thousands of tech firms. Yet SVB invested their money in something much less exciting, as Paul Krugman wrote: U.S. bonds, effectively I.O.U.s from the federal government.

Because the federal government has always paid its bills, U.S. bonds are widely considered the safest investment. SVBs experience shows there are moments when even these safe investments may not pay off. The details get technical, but theyre worth unpacking to understand what went wrong.

Bonds are effectively money that the government borrows from buyers the public before paying them back later, with interest. Market conditions and the Federal Reserve, Americas central bank, help determine that interest rate.

When SVB bought bonds, interest rates were very low. Since then, the Federal Reserve, which sets certain influential rates, increased those to combat rising prices. Now, new bonds can carry interest multiple times higher than those SVB bought.

Imagine, then, that you want to buy bonds today. You would want the newer bonds because they have a higher payout. So when SVB needed to sell bonds, to raise cash that it could use for its customers withdrawals, it could do so only for a discount, taking a loss.

The bank failed to follow basic financial advice: Diversify your portfolio. Its not fraud, said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics. But its an extremely risky, and obviously risky, strategy.

In the past few weeks, venture capitalists and other wealthy customers on social media and in private chats started discussing concerns that SVB could no longer pay its depositors. Some began to move their money out of the bank, and the situation spiraled quickly. Once you start asking, Are we having a bank run?, its too late, my colleague David Enrich, a business editor, said.

A regulatory failure

Financial regulations are supposed to stop these kinds of crises. But Silicon Valley Banks problems were not caught until it was too late which many experts say was a result of insufficient oversight.

Under pressure from banks in 2018, Congress passed bipartisan legislation that Donald Trump signed into law shielding smaller banks, like SVB, from more stringent rules. The banks argued that they were so small that they posed little risk to the broader financial system.

SVBs collapse and the aftermath suggest the banks claims were wrong: Even smaller bank failures can threaten the financial system as a whole, prompting some experts but not all to call for the federal government to get more involved.

Controlled slowdown

To readers of this newsletter, the Federal Reserves involvement in containing the fallout of Silicon Valley Banks collapse may be puzzling. The Fed, after all, has been raising interest rates to slow the economy. An economic slowdown inherently involves businesses, including banks, failing.

The Feds concern is that the bank collapses could go too far and pose bigger systemic risks beyond SVB. Think of it this way: You can stop a runaway car by blowing out its tires, potentially causing a crash. But it would be better if the car stopped by simply braking. Officials are trying to get the economy to brake to a safer speed one in which inflation isnt so high.

The economic slowdown that the Fed hopes for would still affect everyday Americans, in both lower prices and also potentially higher unemployment rates. But that outcome is better than an uncontrolled bank run that topples the financial system and takes the rest of the economy, and your 401(k), down with it.


In class exercise: answer: BBBAB ABABC

1. Why did Silicon Valley Bank collapse?

A) Insufficient customers

B) Inadequate oversight

C) Foreign investments


2. How did the government assist customers of closed banks?

A) Lowering interest rates

B) Providing emergency help

C) Imposing strict regulations


3. What potential fallout worries people when banks collapse?

A) Banks lacking in technology

B) Wider financial impact

C) Decreased interest rates


4. How did Silicon Valley Bank primarily invest its money?

A) U.S. bonds

B) Technology startups

C) Foreign currencies


5. What's the main goal of the Biden administration and the Federal Reserve?

A) Encourage bank runs

B) Prevent financial calamity

C) Promote high inflation


6. Why did SVB face challenges selling bonds for cash?

A) Low buyer interest

B) Favorable market conditions

C) High bond demand


7. How did experts describe SVB's investment strategy?

A) Fraudulent

B) Risky

C) Innovative


8. What triggered concerns about SVB's ability to pay depositors?

A) Social media discussions

B) Government warnings

C) SVB's advertising


9. Why did Congress pass legislation in 2018?

A) Encourage risk-taking

B) Protect smaller banks

C) Promote bigger banks


10. What's the primary concern for the Federal Reserve in this situation?

A) Lowering unemployment

B) Stopping inflation

C) Avoiding uncontrolled bank runs

Homework Assignment for Special Topic Bank Failure (due along with the first midterm exam)

Based on the papers covered in class or from other sources you've reviewed, who should be attributed with accountability for the bank failures observed in 2023?


How Silicon Valley Bank Collapsed in 36 Hours: What Went Wrong (Video, FYI)

A regulatory filing sparked a run on the bank. Then, the FDIC took control of SVB.

By Wall Street Journal Mar 15, 2023 12:16 pm

Silicon Valley Bank collapsed in less than two days. In that time, its stock price fell over 60% and customers tried to withdraw $42 billion. Heres how SVB became the second-largest U.S. bank failure ever and what it means for customers in the future. Illustration: Alexandra Larkin





Law School professor who served as Fed regulator talks moral hazard, implications for inflation after SVB collapse rocks Washington and Wall Street (FYI only)

BY Christina Pazzanese Harvard Staff Writer, DATEMarch 14, 2023



Federal regulators have responded to the collapse of Silicon Valley Bank and other tech-focused institutions, taking measures to stabilize financial markets and prevent further bank failures. Critics argue that the banks benefited from 2018 regulatory relief, potentially incentivizing risky behavior. Daniel Tarullo, former member of the Federal Reserve Board, highlights supervisory failure in the case of SVB and discusses how a relaxation of regulations might have contributed to recent problems. He acknowledges the challenge of balancing moral hazard concerns with crisis response. Rising interest rates and inflation figures complicate the Federal Reserve's decision-making in addressing financial vulnerabilities.


In recent days, federal regulators have taken dramatic steps to stabilize financial markets, protect depositors from ruin, and prevent more bank failures following the collapse of Silicon Valley Bank and a handful of other small, tech-focused institutions.


The measures by the U.S. Treasury, the Federal Reserve Board, and the Federal Deposit Insurance Corporation seem to have calmed the waters for now. But the failures have raised questions about how banks servicing tech- and investment-savvy clientele could plunge so quickly and precipitously. The Justice Department, the Securities and Exchange Commission, and the Federal Reserve have all pledged to open investigations.


Critics say these banks sought and got relief in 2018 from federal regulations designed to prevent the very conditions that led to their failure and worry that a bailout will incentivize other banks to act rashly and expect similar treatment in the future.


To better understand whats going on, the Gazette spoke with Daniel Tarullo, Nomura Professor of International Financial Regulatory Practice at Harvard Law School. From 2009 to 2017, he was a member of the Federal Reserve Board and the Federal Open Market Committee, which sets interest rates for commercial banks. As oversight governor for supervision and regulation, he led the boards financial regulatory reforms, including implementation of the 2010 Dodd-Frank Act. The interview has been edited for clarity and length.



Daniel Tarullo

GAZETTE: Theres been a lot of finger-pointing. Who is to blame for these bank failures?


TARULLO: Whether this was a regulatory failure or a supervisory failure or both remains to be answered, to some degree, but I think we can be reasonably confident there was at least a supervisory failure. In the case of Silicon Valley Bank, the supervisors at the Federal Reserve Bank of San Francisco did not see the problem coming, presumably had not looked at the liquidity situation and the potential problem with Treasury securities that had lost value. Was that strictly the failure of the San Francisco Fed? Or were they acting under the guidelines they had been given by the Board of Governors in Washington? I ask that because over the last several years, there was a message sent to supervisors that they were not supposed to be as strict and stringent with their banks as they had been.


GAZETTE: Was that message tied to the 2018 rollback of Dodd-Frank or a separate issue?


TARULLO: The supervision is a separate issue. Debate is swirling around how much difference the 2018 legislation, and then the Federal Reserves implementation of that legislation, in 2019, made. As best as I can determine, there was one potential point that may have made a difference, not in the legislation, but in the changes that the Fed itself made. But it doesnt appear that change was directly responsible for the problems. I do think that that set of changes reflected a relaxation of regulation across the board by the Fed, which probably did contribute to the problems we have seen over the past week.


GAZETTE: Are the FDIC, Treasury, and the Federal Reserve taking appropriate steps to stabilize the banking industry?


TARULLO: Well see. Yesterday it didnt look as though that was the case. Now, midday on Tuesday, things have calmed down. In these kinds of situations, sometimes theres a pause and then things get worse again. Sometimes theres a pause and things kind of stabilize. We just dont know where we are right now. The Fed and the FDIC and the Treasury took, on a very ad hoc basis, a set of steps they felt they needed to take to stop a further run on other banks providing guarantees for uninsured depositors, and making quite favorable terms for Fed funding available to other banks that may have put themselves in a vulnerable position. It was an appropriate if unfortunate response unfortunate in its implications for policy going forward, but appropriate in that the Biden administration and the banking agencies did not want to take big risks with the banking system.


GAZETTE: Is the FDICs guarantee of deposits above its standard $250K maximum a move that may ultimately prove a Pandoras box, if everyone expects similar treatment in the future?


TARULLO: In the middle of a crisis, regulators, supervisors, and the president cannot worry too much about moral hazard. Look what happened when the government paused over the moral hazard question with Lehman Brothers in the fall of 2008 its failure set off the most acute phase of the financial crisis. But once things have stabilized, the recognition that there is a significant moral hazard out there requires a regulatory response, and thats what were going to get. What the nature of that regulatory response is will depend on what regulators have concluded about how widespread the problem was. But theyre going to have to face the fact that uninsured depositors are now going to believe, ironically, that if they have an uninsured deposit in a bank with lots of uninsured deposits, theyre pretty likely to be bailed out. Under our current system, thats not the kind of incentive you want big depositors to have.


One other thing weve learned is that the promise that we can enforce market discipline by resolving banks when they become bankrupt and allocating the losses, as the law says you should thats just illusory. SVB was the 16th-largest insured depository institution in the country. This was not JP Morgan, this was not Citi, this was not Bank of America. Within 48 hours, the government concluded that it couldnt afford to have losses allocated to those uninsured depositors and took extraordinary steps to protect them. People are now going to have to face the fact that the assumptions laid out in the legislation about what the resolution process can do just dont hold when the heat is on.


GAZETTE: Is the failure of SVB indicative of a broader problem in the banking industry?


TARULLO: The stress weve seen has been concentrated in banks with some combination of the following characteristics: First, their business is heavily dependent on an industry or sector that is not performing as well as the rest of the economy right now tech and crypto, in particular. Second, they hold a portfolio of Treasury securities that were not, under current regulations, required to be marked-to-market, meaning to realize the losses that have resulted because interest rates have gone up. Third, and perhaps most important, they had very high proportions of deposits that were uninsured, large amounts of money they knew was not protected by the FDIC. Thus, when there was a whiff of a problem, depositors pulled money out as quickly as they could.


GAZETTE: Given the role that sharply rising interest rates appears to have played in SVBs collapse, does that suggest the Feds money-tightening approach is not working as planned?


TARULLO: The inflation figures Tuesday morning probably gave people at the Fed pause. They came in a little higher than people had anticipated. The real question is not whether the Feds policy is working it is tightening financial conditions, but is it tightening them so quickly that banks do not have time to adjust? Clearly, many businesses, many financial firms, and many individuals and households have taken hits on their portfolios of fixed-income securities. The Fed should have been asking, as they raised rates so rapidly, what kind of vulnerabilities might there be in banking and other parts of the financial sector. But they probably almost exclusively focused on inflation.


GAZETTE: Does this situation, along with Tuesdays inflation numbers, complicate the Feds path forward on inflation?


TARULLO: Absolutely. They have a Federal Open Market Committee meeting next week. Heres the tension: On the one hand, to the degree that theres uneasiness with respect to banks, any further increase would exacerbate problems with the depreciation and value of long-dated securities that banks already hold. On the other hand, if they dont go forward with at least a modest rate increase, markets again begin jumping to the conclusion that the Fed is going to stop raising rates. Then financial conditions will begin to loosen, and as a result, it may be harder for the Fed to achieve its inflation target. This is going to be a very delicate decision for the Fed next week.


In class exercise based on the above paragraph highlighted answer BAA

Question 1: What characteristics are common among banks that have experienced stress?

A. Heavy dependence on thriving industries.

B. Holding Treasury securities marked-to-market.

C. High proportions of insured deposits.


Question 2: According to Tarullo, why did some banks experience stress?

A. They were heavily reliant on the tech and crypto industries.

B. They held a portfolio of uninsured deposits.

C. They were unaffected by changes in interest rates.


Question 3: What was the significant factor leading to depositors withdrawing money from stressed banks?

A. Lack of FDIC protection for uninsured deposits.

B. Fluctuations in the economy.

C. Inadequate regulations for Treasury securities.



Chapter 11 - 14: Commercial Banking and Investment Banking


Ppt 1 commercial banking I

PPT2 Commercial banking II (Balance sheet)

Part 3 Investment Banking



      Part I SVB failure

      Part II Bank failure in general

      Part III Regulation in banking sector

1)            Summary of the paper on regulation

2)            Glass-Steagall Act

3)            Dodd Frank Act

      Part IV AI in banking sector

      Part V Net interest margin

       Part VI Investment banking

       FYI: VyStar Credit Union: After the outage (FYI only)



How Did Banks Start ? (youtube)


1: When did people first start recording their trade transactions?

A. 2000 A.D.

B. 8000 B.C.

C. 500 B.C.

Answer: B


2: What was the role of goldsmiths in the evolution of banking?

A. They stored goods for traders.

B. They issued the first banknotes.

C. They provided safekeeping and lending services.

Answer: C


3: Which region became the center of the world's banking industry during the medieval period?

A. Asia

B. Mesopotamia

C. Italy

Answer: C


4: What ancient civilizations had evidence of credit and lending services primarily related to seeds?

A. African civilizations

B. Mesopotamian civilizations

C. European civilizations

Answer: B


5: What financial instruments emerged as a result of goldsmiths' expanded services?

A. Coins

B. Promissory notes

C. Bonds

Answer: B


6: Who established the Medici Bank, which became one of the largest and most reputable banks in Europe?

A. Rothschild family

B. Grimaldi family

C. Medici family

Answer: C


7: In which century did banknotes start being printed and standardized?

A. 17th century

B. 18th century

C. 19th century

Answer: B


8: How did banknotes contribute to the United Kingdom's Industrial Revolution?

A. Banknotes led to the decline of industries.

B. Banknotes were used as a form of art during the Revolution.

C. Banknotes played a crucial role in sustaining heightened economic activity.

Answer: C


9: What organizations were established in 1944 to boost economies of developing nations?

A. United Nations

B. International Monetary Fund (IMF) and World Bank

C. World Trade Organization (WTO)

Answer: B


10: Which century saw the advent of banks as we recognize them today?

A. 15th century

B. 17th century

C. 20th century

Answer: C

Part I - Silicon Valley Banks Failure

SIVBQ (Silicon Valley Bank) Financials

Google finance



Silicon Valley Bank (SVB)


Income Statements (in thousands)


Period Ending:





Total Revenue





Cost of Revenue





Gross Profit





Research and Development





Sales, General and Admin.





Non-Recurring Items





Other Operating Items





Operating Income





Add'l income/expense items





Earnings Before Interest and Tax





Interest Expense





Earnings Before Tax





Income Tax





Minority Interest





Equity Earnings/Loss Unconsolidated Subsidiary





Net Income-Cont. Operations





Net Income





Net Income Applicable to Common Shareholders






Balance Sheet

Period Ending:





Current Assets

Cash and Cash Equivalents





Short-Term Investments





Net Receivables










Other Current Assets





Total Current Assets





Long-Term Assets

Long-Term Investments





Fixed Assets










Intangible Assets





Other Assets





Deferred Asset Charges





Total Assets





Current Liabilities

Accounts Payable





Short-Term Debt / Current Portion of Long-Term Debt





Other Current Liabilities





Total Current Liabilities





Long-Term Debt





Other Liabilities





Deferred Liability Charges





Misc. Stocks





Minority Interest





Total Liabilities





Stock Holders Equity

Common Stocks





Capital Surplus





Retained Earnings





Treasury Stock





Other Equity





Total Equity





Total Liabilities & Equity







Silicon Valley Bank and how its outsized investment in securities made it particularly vulnerable to a bank run:


Silicon Valley Bank collapsed on 10 March 2023 after a bank run saw depositors rapidly withdraw funds as they lost confidence in the banks ability to survive. The banks collapse followed concerns that had been growing since 24 February 2023, when Silicon Valley Banks parent company, SVB Financial Group, published its annual consolidated financial statements for the year ended 31 December 2022.


As illustrated by this weeks chart, SVBs consolidated balance sheet at 31 December 2022 comprised assets of $212bn, liabilities of $196bn and equity of $16bn.


Assets consisted of investment securities recorded at amortised cost of $91bn, investment securities recorded at fair value of $26bn, loans of $74bn, cash of $13m, and other assets of $8bn. Liabilities comprised customer deposits of $173bn, short-term debt of $14bn, and other liabilities of $9bn (including long-term debt of $5bn).


Not shown in the chart is the breakdown of equity of $16bn, which at 31 December 2022 primarily comprised preference stock of $4bn, additional paid-in capital of $5bn and $9bn of retained earnings, less $2bn in negative accumulated other comprehensive income.


As disclosed on the face of the balance sheet, the fair value of SVBs $91bn portfolio of held-to-maturity investment securities was $15bn below its carrying value at amortised cost, reflecting how the main fixed-asset securities in this category predominantly federally guaranteed mortgage-backed securities and collateralised-mortgage obligations had fallen in value as interest rates climbed over the course of 2022. These unrealised losses of $15bn were not that far off the $16bn of equity reported by SVB, suggesting the bank would struggle if it ever had to sell these investments before they matured.


SVBs intention had been to hold onto these investments, but circumstances changed on 9 March when depositors concerned about further falls in the value of SVBs assets as interest rates continued to rise during 2023, and an adverse reaction to a belated capital raising exercise launched by SVB on 8 March withdrew $42bn in one day. This forced SVB to rapidly liquidate assets and borrow to find the cash required to repay depositors, but by then the first major digital bank run had gained too much momentum, with depositors attempting to withdraw a further $100bn on Friday 10 March. With insufficient cash to repay the amounts requested by SVBs customers, the bank was closed by regulators that lunchtime.


In class exercise

1: What caused Silicon Valley Bank to collapse in March 2023?

1. What caused Silicon Valley Bank to collapse in March 2023?

A) Economic recession

B) Technological malfunction

C) Bank run and loss of confidence

Answer: C

Explanation: Many depositors withdrew their money rapidly because they lost trust in the bank's ability to survive. This led to the bank's collapse.


2: Why were concerns growing about Silicon Valley Bank's survival before its collapse?

A) A sudden drop in interest rates

B) Doubts about its technology infrastructure

C) Doubts about the accuracy of financial statements

Answer: C

Explanation: People were unsure if the bank's financial statements were true, which made them worry about the bank's future.


3: Which components made up Silicon Valley Bank's balance sheet at the end of 2022?

A) Assets of $212bn, liabilities of $196bn, equity of $16bn

B) Assets of $196bn, liabilities of $212bn, equity of $16bn

C) Assets of $16bn, liabilities of $196bn, equity of $212bn

Answer: A

Explanation: The bank had $212bn in assets, owed $196bn to others (liabilities), and had $16bn that belonged to the bank itself (equity).


4: What category of investments faced significant losses on Silicon Valley Bank's balance sheet?

A) Securities recorded at amortized cost

B) Fair value recorded securities

C) Short-term debt investments

Answer: A

Explanation: Investments that were meant to be held until maturity lost value, causing losses for the bank.


5: How much did depositors withdraw from Silicon Valley Bank on 9 March?

A) $15bn

B) $42bn

C) $100bn

Answer: B

Explanation: On that specific day, depositors took out a total of $42 billion from their bank accounts.


6: What triggered the bank's quick liquidation of assets?

A) A drop in interest rates

B) Government intervention

C) Massive withdrawals by depositors

Answer: C

Explanation: When many people took their money out of the bank, the bank had to sell its assets quickly to get enough cash to meet the demands.


7: What type of securities mainly contributed to the unrealized losses on SVB's balance sheet?

A) Corporate bonds

B) Federally guaranteed mortgage-backed securities

C) International stocks

Answer: B

Explanation: Certain investments linked to mortgages lost value, causing unrealized losses for the bank.


8: What was the main result of the capital raising exercise SVB conducted on 8 March?

A) Increased customer deposits

B) Restoration of depositor confidence

C) Negative reaction from depositors

Answer: C

Explanation: The bank's attempt to raise capital made depositors even more concerned, leading to a negative response.


9: How did SVB try to address the cash shortage during the crisis?

A) Selling non-performing assets

B) Borrowing funds and selling assets

C) Seeking government aid

Answer: B

Explanation: The bank borrowed money and sold assets to acquire the cash needed to repay depositors during the crisis.


10: Why did regulators close Silicon Valley Bank on 10 March?

A) Involvement in illegal activities

B) Cybersecurity breach

C) Inability to meet withdrawal demands

Answer: C

Explanation: The bank lacked sufficient funds to fulfill the withdrawal requests of depositors, prompting regulators to intervene and close the bank.



What Is a Bank Failure? Definition, Causes, Results, and Examples

By JULIA KAGAN Updated May 14, 2023 Reviewed by SOMER ANDERSON Fact checked by SUZANNE KVILHAUG


What Is a Bank Failure?

A bank failure is the closing of an insolvent bank by a federal or state regulator. The federal government has the power to close national banks and banking commissioners have the power to close state-chartered banks.


Banks can be closed when they are unable to meet their obligations to depositors and others. When a bank fails, the Federal Deposit Insurance Corporation (FDIC) covers the insured portion of a depositor's balance, including money in money market accounts.



       Bank failures occur when the bank cannot meet its obligations to creditors and depositors.

       The Federal Deposit Insurance Corp. (FDIC) protects deposits for up to $250,000 per depositor, per account.

       In some cases, the FDIC may fully reimburse for lost deposits of a failed bank without using federal or state tax revenues.

       Bank failures are often difficult to predict.


Understanding Bank Failures

A bank fails when it cant meet its financial obligations to creditors and depositors. This could occur because the bank has become insolvent or because it no longer has enough liquid assets to fulfill its payment obligations.

The most common cause of bank failure is when the value of the banks assets falls below the market value of the banks liabilities, which are the bank's obligations to creditors and depositors. This might happen because the bank loses too much on its investments. Its not always possible to predict when a bank will fail.


What Happens When a Bank Fails?

When a bank fails, it may try to borrow money from other solvent banks in order to pay its depositors. If the failing bank cannot pay its depositors, a bank panic might ensue in which depositors run on the bank in an attempt to get their money back. This can make the situation worse for the failing bank, by shrinking its liquid assets as depositors withdraw cash.


Since the creation of the FDIC, the federal government has insured bank deposits up to $250,000 in the U.S. When a bank fails, the FDIC takes control and will either sell the failed bank to a more solvent bank or take over the operation of the bank.


In many cases, depositors who have money in the failed bank will experience no change in their experience of using the bank. Theyll still have access to their money and should be able to use their debit cards and checks as normal.


In the event that a failed bank is sold to another bank, account holders automatically become customers of that bank and may receive new checks and debit cards.


Examples of Bank Failures

During the 2008 financial crisis, the biggest bank failure in U.S. history occurred with the closure of Washington Mutual (WaMu), which had $307 billion in assets. Washington Mutual struggled for several reasons, including a poor housing market and a run on deposits. WaMu was eventually bought by JPMorgan Chase for $1.9 billion.


The second-largest bank failure in the U.S. was the closure of Silicon Valley Bank in 2023 after a bank run in which customers had withdrawn $42 billion within 48 hours. The bank had $209 million in assets at the time.


Bank failures were common leading up to and into the Great Depression when thousands of banks failed. By the time the FDIC was created in 1933, American depositors had lost a substantial amount of money due to bank failures. Without federal deposit insurance protecting these deposits, they had no way of getting their money back.


Protections Against Bank Failures

The Federal Reserve now usually requires banks to keep a certain amount of cash reserves on hand to try to reduce the risk of failure. The reserve amount is a portion of the deposits it holds. Typically a bank must hold over 10% of its liabilities in cash reserves, but this requirement was suspended in 2020 amid the COVID-19 pandemic and it has yet to be reinstated.


The FDIC may sometimes provide reimbursement beyond its coverage limits. For example, it used funds from the Deposit Insurance Fund to fully reimburse depositors when Silicon Valley Bank failed in 2023. The money in the fund is furnished by quarterly fees charged to banks, not from tax revenue.


To better protect yourself against losing money if a bank fails, consider keeping only up to the FDIC-insured limit, or $250,000, in a bank account. If you need to deposit more funds, you can open another account at a different bank for the same FDIC protection.


What Happens During a Bank Failure?

When a bank fails, the FDIC is required to use the least costly solution to resolve the failure. It will often sell the bank's assets to another bank. The FDIC will reimburse depositors for up to $250,000 per account, per institution, and in some cases, it may fully reimburse lost funds.


What Was the Biggest Bank Failure?

The biggest U.S. bank failure was the collapse of Washington Mutual (WaMu) in 2008. At the time, it had about $307 billion in assets. The bank failure was caused by a number of factors, including a poor housing market and a run on deposits in which customers withdrew $16.7 billion within two weeks.


When Was the Last Bank Failure?

The failure of the Silicon Valley Bank in March 2023 was among the most recent bank failures. To find the last bank failure, check the FDIC's Failed Bank List, which includes banks that have failed since Oct. 1, 2000.


In class exercise

1: What is a bank failure?

A) A sudden shutdown due to technical issues

B) A bank's inability to fulfill financial obligations

C) A change in bank ownership

Answer: B

Explanation: A bank failure occurs when a bank cannot meet its financial obligations to creditors and depositors.


2: Who has the power to close national banks during a bank failure?

A) Banking commissioners

B) State regulators

C) Federal government

Answer: C

Explanation: The federal government has the authority to close national banks during a bank failure.


3: What does the FDIC do when a bank fails?

A) Takes over the bank's operations

B) Sells the bank's assets to another bank

C) Provides full reimbursement to all depositors

Answer: B

Explanation: When a bank fails, the FDIC may sell the bank's assets to another bank to resolve the failure.


4: What is the most common cause of bank failure?

A) Technological glitches

B) Poor customer service

C) Insolvency due to asset value decline

Answer: C

Explanation: The value of a bank's assets falling below its liabilities can lead to insolvency and is a common cause of bank failure.


5: What agency covers the insured portion of a depositor's balance when a bank fails?




Answer: C

Explanation: The Federal Deposit Insurance Corporation (FDIC) covers the insured portion of a depositor's balance during a bank failure.


6: Why might a bank experience a run during a failure?

A) To buy assets from the failing bank

B) To withdraw money before the bank closes

C) To invest in the bank's stocks

Answer: B

Explanation: During a bank failure, depositors may rush to withdraw their money to avoid losing their deposits.


7: What protections did the FDIC provide for depositors during the 2008 financial crisis?

A) Full reimbursement for all depositors

B) Up to $250,000 per depositor, per account

C) Loan assistance for depositors

Answer: B

Explanation: The FDIC insured deposits up to $250,000 per depositor, per account during the 2008 financial crisis.


8: What is the primary source of funding for the FDIC's Deposit Insurance Fund?

A) Federal tax revenue

B) Quarterly fees charged to banks

C) Donations from individuals

Answer: B

Explanation: The FDIC's Deposit Insurance Fund is primarily funded by quarterly fees charged to banks, not federal tax revenue.


9: How can individuals better protect themselves against losing money in a bank failure?

A) Keep all funds in a single account

B) Keep up to the FDIC-insured limit in one account

C) Open multiple accounts at the same bank

Answer: B

Explanation: To avoid losing money in a bank failure, individuals can keep up to the FDIC-insured limit, which is $250,000, in one account.


10: What happened to Silicon Valley Bank in 2023 that led to its failure?

A) A housing market crash

B) A run on deposits

C) Mismanagement by the board

Answer: B

Explanation: A bank run occurred where customers withdrew $42 billion within 48 hours, leading to the failure of Silicon Valley Bank in 2023.

Bank Failures in Brief Summary 2001 through 2023

There were 565 bank failures from 2001 through 2023. Please select the year buttons below for more information.

Bank Closing Summary  2001 through 2020 - Detailed table below the graph

Summary by Year
(Approximate asset dollar volume based on figures from the press releases)

























Bank Failures
























Total Assets (Millions)

























In class exercise

1: In which year did the highest number of bank failures occur?

A) 2008

B) 2010

C) 2019

Answer: B) 2010

2: In which year did no bank failures occur?

A) 2005

B) 2015

C) 2021

Answer: A) 2005


3: How many bank failures occurred in the year 2012?

A) 18

B) 4

C) 51

Answer: C) 51

4: In which year did the second-highest number of bank failures occur?

A) 2019

B) 2010

C) 2009

Answer: C) 2009


5: Which year had the highest total assets among the listed years?

A) 2011

B) 2023

C) 2008

Answer: B) 2023



Take away: The Factors Behind SVB's Failure

       When people put their money in a bank, they trust that it's safe, backed by government protection of up to $250,000. But SVB had a lot of deposits that weren't insured, so when the market got shaky, many depositors withdrew their money. This was one big reason for SVB's failure.

       Another problem was that the bank's managers used the deposited money to make risky investments. They thought that taking bigger risks would lead to bigger profits. However, if these investments went bad, the managers could just close the bank and leave the depositors in trouble. It is called Moral Hazard. This term comes from the idea that when there's a disconnect between risk-taking and the consequences of those risks, it creates a moral dilemma where the bank's decision-makers might be tempted to take bigger risks than they otherwise would, since they don't have to fully bear the downside.

       Another issue was that SVB didn't handle the risks well, especially when interest rates were going up. This made the situation worse and added to the bank's downfall.





Part II: Banking Industry in general



Topics for class discussion


1.     What are the key differences between large and small banks in terms of their operations and impact on the economy?

2.     How do banks make money and generate profits? How the banks make the big bucks (youtube)

3.     How can you tell that banks are getting bigger and bigger? Who need big banks? What is too big to fail (Bloomberg university) video


Benefits of Local Banks vs. Big Banks

Regional banks will suffer from regulation similar to large banks: Man Group CEO (youtube)





When you choose a bank, its critical to find the products, services, and rates that meet your needs. As you evaluate large national banks vs. local banks and credit unions, you may wonder if the size of an institution matters. To some degree, it does, but big banks and small banks can offer essential services like checking and savings accounts.


Heres what to consider as you compare banks:



Choose a bank thats easy to work with on your terms. If you prefer to bank in-person, some institutions might have a better presence than others in your area.



Fees are often lower at small institutions, but thats not always the case. Identify your banking needs and compare fees for the services you need.



Small institutions can have a surprisingly large offering of products and services. But sometimes you need the horsepower of a megabank.


Banking with a local institution helps to support your local economy, and it may make your banking experience easier. But there are always pros and cons.


Lets explore the differences between big banks and local banks in more detail.


Megabanks Have a National Reach


Potential Convenience

Large national banks with household names dominate large cities, and they even reach into smaller markets. If you value in-person banking, a bank with branches nearby might be a decent option. They can offer one-stop shopping, allowing you to get multiple services from the same institution. For example, you might be able to use one login for your checking and savings accounts, credit cards, and loans.

Large banks that have a national reach include Bank of America, Capital One, Chase Bank, Wells Fargo, and many other large institutions.


Sometimes Frustrating

Big banks often have rigid systems and processes, which makes dealing with them difficult. If you need help from customer service, you may be forced to call a national toll-free number, even though you know and trust the local bankers. You may have to speak with relatively new hires or answer multiple fraud department questions just to open an account. Contrast that experience with a local bank, where the same person can handle everything for you in one sitting.

Costs Vary

Free checking is increasingly hard to find at megabanks. You can typically qualify for fee waivers by keeping sufficient cash in your account or setting up direct deposit, but genuinely free accounts are rare. You can occasionally find fee-free business checking at national banks, while local banks charge modest fees.


Local Banks Engage in the Community

Community banks and local credit unions are an excellent option for most banking needs. Just because theyre small doesnt mean they cant meet your needs. Some institutions limit their offerings, others outsource services, and some provide everything you need in-house.


Competitive Fees and Rates

Local banks are often a good bet for free checking accountsthe account you probably need most. Some offer standard free checking to everybody, while others waive fees if you just agree to receive electronic statements. They also compete with attractive rates on savings accounts and loans. Savings rates might still be higher at online banks, but theres nothing to prevent you from having multiple accounts (online and local).


Local Knowledge

Because theyre engaged in local matters, local banks may make transactions easier. Thats particularly true if you need to borrow money. For example, megabanks might be unwilling to fund your local business, investment property, or agriculture loan, but local banks are accustomed to evaluating loans in your area.


Personal Service

For better or worse, local banks typically provide more personal service than big banks. Its not uncommon to work with the same person over time. Bank staff can even learn about your needs and suggest bank products that may be helpful. You develop relationships and know what to expect and who to talk to when you have questions. At the same time, you lose the anonymity that comes with being a big bank customer. If you live in a particularly small town, you may prefer to keep a low profile.


Offerings Vary

While local banks and credit unions can offer everything from checking accounts to merchant accounts to wealth management, some institutions focus on basic consumer needs. If your favorite local bank doesnt handle business accounts and you start freelancing, youll need to look elsewhere.


Community Involvement

Your banking needs to drive your choice of banks, but you may feel a sense of satisfaction when working with a local institution. Local banks and credit unions are part of the local economy, and they often give back. Youre likely to see a local institutions logo at charity races and other events, signaling that they contributed money or other resources to help make the event a reality.


In class exercise

1: What is a key consideration when choosing between large national banks and local banks?

A) The color of the bank's logo

B) The number of branches nationwide

C) Finding products, services, and rates that meet your needs

Answer: C

Explanation: It's critical to find products, services, and rates that meet your needs when choosing a bank.


2: What can you look for in terms of convenience when comparing banks?

A) The bank's logo design

B) The presence of branches in your area

C) The bank's history and heritage

Answer: B

Explanation: If you value in-person banking, you might consider a bank with branches nearby for convenience.


3: What is a potential advantage of using a large national bank for banking services?

A) Smaller variety of services

B) One-stop shopping with multiple services under the same institution

C) Exclusive access to online banking features

Answer: B

Explanation: Large national banks can offer one-stop shopping, allowing you to access multiple services from the same institution.


4: Why might dealing with customer service at big banks be frustrating?

A) Local bankers are not well-trained

B) You can only communicate via email

C) Rigid systems and processes that make interactions difficult

Answer: C

Explanation: Big banks often have rigid systems and processes, making dealing with them difficult, even if you know and trust local bankers.


5: What is a distinguishing feature of local banks in terms of personal service?

A) They have extensive online services

B) They offer international banking options

C) They typically provide more personal service than big banks

Answer: C

Explanation: Local banks usually provide more personal service, and it's not uncommon to work with the same person over time.


6: What type of accounts are local banks often a good option for?

A) Investment accounts

B) Business checking accounts

C) Free checking accounts

Answer: C

Explanation: Local banks are often a good bet for free checking accounts, which are mentioned as an essential account.


7: What advantage do local banks have in terms of local knowledge?

A) They provide global financial advice

B) They have lower interest rates

C) They are engaged in local matters and understand local lending needs

Answer: C

Explanation: Local banks are accustomed to evaluating loans in your area, making transactions like local business, investment property, or agriculture loans easier.


8: Why might you lose anonymity when dealing with a local bank?

A) Because local banks require fingerprint authentication

B) Because local bank employees are nosy

C) Because you develop relationships and bank staff can learn about your needs

Answer: C

Explanation: Working with local banks may involve personal relationships and staff learning about your needs, which contrasts with the anonymity of big banks.


9: What can local banks and credit unions often offer in terms of competitive rates?

A) Higher rates on online savings accounts

B) Lower rates on loans

C) Competitive rates on savings accounts and loans

Answer: C

Explanation: Local banks compete with attractive rates on savings accounts and loans, although online banks might still offer higher savings rates.


10: What is a benefit of working with a local institution in terms of community involvement?

A) They offer more online banking features

B) They have lower fees

C) They contribute to local events and the economy

Answer: C

Explanation: Local banks often give back to the community by contributing money or resources to local events, demonstrating their involvement in the local economy.

Homework (Due with the first midterm exam around mid September)


Question 1: Too big too fail. What is your opinion on this statement? Should we worry about banks getting bigger and bigger? Why or why not?

Question 2: What are the pro and con for big banks? How can regional banks compete against mega banks?

Question 3: What is your opinion on the application of AI in the banking industry?

Question 4: What is net interest margin? How much is the net interest margin of BAC as of June 2023?

Question 5: List Two significant banking regulations, along with their intended objectives.

       For Glass Steagall Act: What is the Glass Steagall Act and how did it come about? - GreenLine

       For Dodd Frank Act: What is Dodd Frank? (youtube)


Part III: Governmental Regulations on Banking Industry


A Brief History of U.S. Banking Regulation


Reviewed by MICHAEL J BOYLE on July 30, 2021


Early Attempts at Regulation in Antebellum America


From the establishment of the First Bank of the United States in 1791 to the National Banking Act of 1863, banking regulation in America was an experimental mix of federal and state legislation. The regulation was motivated, on the one hand, by the need for increased centralized control to maintain stability in finance and, by extension, the overall economy. While on the other hand, it was motivated by the fear of too much control being concentrated in too few hands.


Despite bringing a relative degree of financial and economic stability, the First Bank of the United States was opposed to being unconstitutional, with many fearing that it relegated undue powers to the federal government. Consequently, its charter was not renewed in 1811. With the government turning to state banks to finance the War of 1812 and the significant over-expansion of credit that followed, it became increasingly apparent that financial order needed to be reinstated. In 1816, the Second Bank of the United States would receive a charter, but it too would later succumb to political fears over the amount of control it gave the federal government and was dissolved in 1836.


Not only at the federal level, but also at the level of state banking, obtaining an official legislative charter was highly political. Far from being granted on the basis of proven competence in financial matters, successful acquisition of a charter depended more on political affiliations, and bribing the legislature was commonplace. By the time of the dissolution of the Second Bank, there was a growing sense of a need to escape the politically corrupt nature of legislative chartering. A new era of free banking emerged with a number of states passing laws in 1837 that abolished the requirement to obtain an officially legislated charter to operate a bank. By 1860, a majority of states had issued such laws.


In this environment of free banking, anyone could operate a bank on the condition, among others, that all notes issued were back by proper security. While this condition served to reinforce the credibility of note issuance, it did not guarantee immediate redemption in specie (gold or silver), which would serve to be a crucial point. The era of free banking suffered from financial instability with several banking crises occurring, and it made for a disorderly currency characterized by thousands of different banknotes circulating at varying discount rates. It is this instability and disorder that would renew the call for more regulation and central oversight in the 1860s.


Increasing Regulation from the Civil War to the New Deal


The free banking era, characterized as it was by a complete lack of federal control and regulation, would come to an end with the National Banking Act of 1863 (and its later revisions in 1864 and 1865), which aimed to replace the old state banks with nationally chartered ones. The Office of the Comptroller of the Currency (OCC) was created to issue these new bank charters as well as oversee that national banks maintained the requirement to back all note issuance with holdings of U.S. government securities.


While the new national banking system helped return the country to a more uniform and secure currency that it had not experienced since the years of the First and Second Banks, it was ultimately at the expense of an elastic currency that could expand and contract according to commercial and industrial needs. The growing complexity of the U.S. economy highlighted the inadequacy of an inelastic currency, which led to frequent financial panics occurring throughout the rest of the nineteenth century.


With the occurrence of the bank panic of 1907, it had become apparent that Americas banking system was out of date. Further, a committee gathered in 1912 to examine the control of the nations banking and financial system. It found that the money and credit of the nation were becoming increasingly concentrated in the hands of relatively few men. Consequently, under the presidency of Woodrow Wilson, the Federal Reserve Act of 1913 was approved to wrest control of the nations finances from banks while at the same time creating a mechanism that would enable a more elastic currency and greater supervision over the nations banking infrastructure.


Although the newly established Federal Reserve helped to improve the nations payments system and created a more flexible currency, it's a misunderstanding of the financial crisis following the 1929 stock market crash served to roil the nation in a severe economic crisis that would come to be known as the Great Depression. The Depression would lead to even more banking regulation instituted by President Franklin D. Roosevelt as part of the provisions under the New Deal. The Glass-Steagall Act of 1933 created the Federal Deposit Insurance Corporation (FDIC), which implemented regulation of deposit interest rates, and separated commercial from investment banking. The Banking Act of 1935 served to strengthen and give the Federal Reserve more centralized power.


1980s Deregulation and Post-Crisis Re-Regulation


The period following the New Deal banking reforms up until around 1980 experienced a relative degree of banking stability and economic expansion. Still, it has been recognized that the regulation has also served to make American banks far less innovative and competitive than they had previously been. The heavily regulated commercial banks had been losing increasing market share to less-regulated and innovative financial institutions. For this reason, a wave of deregulation occurred throughout the last two decades of the twentieth century.


In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act, which served to deregulate financial institutions that accept deposits while strengthening the Federal Reserves control over monetary policy. Restrictions on the opening of bank branches in different states that had been in place since the McFadden Act of 1927 were removed under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Finally, the Gramm-Leach-Bliley Act of 1999 repealed significant aspects of the Glass-Steagall Act as well as the Bank Holding Act of 1956, both of which had served to sever investment banking and insurance services from commercial banking. From 1999 onwards, a bank could now offer commercial banking, securities, and insurance services under one roof.


All of this deregulation helped to accelerate a trend towards increasing the complexity of banking organizations as they moved to greater consolidation and conglomeration. Financial institution mergers increased with the total number of banking organizations consolidating to under 8000 in 2008 from a previous peak of nearly 15,000 in the early 1980s. While banks have gotten bigger, the conglomeration of different financial services under one organization has also served to increase the complexity of those services. Banks began offering new financial products like derivatives and began packaging traditional financial assets like mortgages together through a process of securitization.


At the same time that these new financial innovations were being praised for their ability to diversify risk, the sub-prime mortgage crisis of 2007 that transformed into a global financial crisis and the need for the bailout of U.S. banks that had become too big to fail has caused the government to rethink the financial regulatory framework. In response to the crisis, the Obama administration passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, aimed at many of the apparent weaknesses within the U.S. financial system. It may take some time to see how these new regulations affect the nature of banking within the U.S.


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