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Business Insider Explains Why an Increase in US Bank Failures is Possible

As a blog writer covering all things investing and money, I couldn’t ignore the recent bank failures that have been making headlines. From Silicon Valley Bank to Signature Bank and First Republic, these failures have raised concerns about the stability of the banking industry in the US.

Since the 2008 financial crisis, over 542 banks have failed, with more recent closures like Philadelphia’s Republic First Bank in 2024. The question on everyone’s mind is, why are banks struggling right now? One major reason is the rise in interest rates, which are currently at their highest in over 20 years. The Federal Reserve has been raising rates at a rapid pace to combat inflation, making borrowing more expensive for consumers.

This increase in interest rates has had a ripple effect on banks. With debt becoming more expensive, fewer people are borrowing from banks, leading to defaults and losses. Additionally, some depositors are moving their money to high-yield savings accounts and money market funds, causing banks to pay more for deposits. Furthermore, banks that bought long-term bonds at lower rates are now facing lower yields, impacting their profitability.

So, what does all of this mean for your money? When you deposit money in a bank, it’s not just sitting in a vault; it’s being used for lending and investments. If a bank fails to manage its risks properly, it could face a liquidity crisis and fail to meet withdrawal needs or pay back borrowed funds, leading to a bank run.

Smaller regional and community banks are particularly vulnerable right now due to their lack of diversification. When these banks fail, they may be acquired by larger banks, reducing access to banking services for small businesses and communities. This consolidation can have negative effects on economic growth and stability.

The recent failures of Silicon Valley Bank and Signature Bank highlight the risks associated with high exposure to specific sectors like tech and commercial real estate. With commercial real estate loans set to mature in 2024, the sector is under increased scrutiny due to lower demand and higher interest rates.

While the stress on banks today is not as severe as during the 2008 financial crisis, it’s important to take steps to protect your money. Ensure your bank offers FDIC insurance deposits and consider splitting accounts or moving funds to stay under the insured limit. Staying informed and asking questions to your bank can help safeguard your finances in uncertain times.

In conclusion, while predicting bank failures is challenging, staying vigilant and proactive can help protect your money and contribute to a safer banking system for all.

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