These are troubling times in the banking industry. California-based Silicon Valley Bank and New York-based Signature Bank have both collapsed, the second and third largest bank failures in U.S. history, according to The Associated Press.
In essence, they ran out of money.
"We have what's called a run on the bank,” said Fred Floss, economics professor at SUNY Buffalo State University. “So everybody to goes the bank at one time and they all try to get their money out. But the bank doesn't have the money. They've loaned it out so the bank essentially collapses."
Floss says Silicon Valley Bank's failure happened amid concerns about a downturn in the technology sector, where it had made investments. Signature Bank's issues stem from worries about the value of cryptocurrency.
Bank investment in mortgage securities, and rising interest rates — an effort to slow down inflation by the Federal Reserve — also contributed to the problems.
"We need to put controls back in, particularly credit controls and other controls back in for smaller banks so that have enough cash on hand,” Floss said. “They're not going to make as much profit, but they'll be a much safer entity.”
While the FDIC insures any deposits up to $250,000, the federal government has stepped in to assure depositors can still access all their money at those two failed banks. It's also set up a loan program to help prevent a larger run on banks.
"People shouldn't be afraid to put their money in the bank,” Floss said. “They shouldn't be afraid to use the banks to pay their bills.”
And what about your investments in the stock market like your 401k? Financial adviser Ethan Gilbert, partner at Rialto Wealth Management, says Wall Street is keeping a close eye on the situation, but long-term investors should ride it out.
"Most people shouldn't do anything," Gilbert said. "They shouldn't look at this and say, ‘I need to sell out of stocks’ or ‘I need to make a change to my portfolio.’ Markets move very quickly."
Gilbert says the banking issues may actually cause the Federal Reserve to slow down plans to increase interest rates, which could actually help investors.
"I think market was fearful, a lot of people were fearful that the Fed was going to hike too much this year and that seems less likely now, so that could be a good thing for stocks for the rest of the year," Gilbert said.
The bottom line: Both experts believe the overall financial sector, and your money, should be able to weather this storm.
