Press "Enter" to skip to content

Why do Banks Fail and How to Stay Protected

Why do Banks Fail and How to Stay Protected

There is a growing concern that the centralized financial system is on the brink of another recession. The current state of the market seems to indicate that the future of banking could be shaky in the coming months as there have been +50 bank failures recently. Bank failures are an issue that should raise concern for traders. Here’s some insight into why banks fail and how you can avoid taking losses.

Since the start of the new millennium, there have been roughly 565 bank failures in the US alone. When you zoom out to a global scale, this number balloons even further. While it’s normal for a few banks to fail every year, the recent surge has raised concerns. Since there are more options than ever before, savvy traders have begun to exit the centralized banking system to avoid some of its pitfalls

What is a Bank Failure?

The term bank failure refers to a moment when the bank has fewer assets than its liabilities market value. When this occurs, a bank will shutter and usually close or get purchased by another institution. There are a lot of factors that could drive a bank to failure including bad lending practices, management, and reserves.

Notably, smaller banks are much more vulnerable to failures than larger organizations. The main reason for their added vulnerability is that they don’t have massive asset reserves to fall back on like their larger counterparts. Consequently, there have been far more small bank failures versus larger ones recently. However, it should be noted that larger bank failures result in a waterfall effect with smaller banks going insolvent as a result of their close ties with the larger firm.

Reasons a Bank Fails

There are a lot of factors that can lead to banks losing their solvency and collapsing. In many instances, it can be as simple as the bank being intertwined with another failing organization. Also, there are instances when banks hold large reserves in government bonds. When these drop in value due to rising interest rates, there is a massive drop in reserve value for the bank.

Loss of Faith

Another reason why banks fail is due to a loss of faith by clientele. A bank requires its clients to trust its actions and capability to store their wealth. When this trust is broken due to bad practices, lies, or a sudden revelation of overspending or lending, it results in a bank run.

Bank Run

A bank run occurs when all of the bank’s clients suddenly withdraw their funds at the same time. Bank runs have been a major concern and are part of the reasons there is special legislation in place by governments to protect against these actions. A bank run occurs because clients drain the firm of its funding and reserves. These actions result in a default on the bank.

Bank runs have been a major problem since the earliest days of the current banking system. The Great Depression saw bank runs obliterate the market. This was America’s darkest economic hours with unemployment and interest rates both in double digits. Since that time, there have been some changes in the market to prevent this scenario but bank runs still occur today.

Another well-known example of a more recent bank run occurred in August 2007. In this incident, Countrywide Financial was suddenly run on by clients following concerns within the subprime mortgage market. The actions resulted in the bank failing alongside a variety of other organizations.

Today’s banking crisis has many similarities to the 2008 mortgage crisis. Loose lending practices and growing debt are two similar factors that have economists worried. This economic recession has some additional issues that make it even more threatening. This recession appears to be brought on by factors such as war, bad risk management, and rising interest rates

What Happens When a Bank Fails

When a bank fails there are a few things that can happen. If the bank is FDIC insured, there will be protections put in place to limit your losses. If the bank isn’t FDIC insured, your funds will be lost and recovery will be nearly impossible. FDIC insurance is a special protection that was instituted following the bank runs of the Great Depression.

FDIC insured

FFDIC-insured accounts are protected by the government up to $250K. If your FDIC-insured bank suddenly fails, the government will issue a check to the insured bank. The system has proven to be a great way to prevent losses as there has been no lost money due to bank failures in the US since 1933.

FDIC-insured banks agree to certain terms such as enabling regulators to sell the bank to another firm in the event of failure. The agency is also authorized to pay depositors for their losses up to the threshold amount. These protections have been enough to date but don’t account for inflation.

Recent Bank Failures

If you zoom out on the bigger picture, only about 1% of FDIC-insured banks have failed annually over the past decade. However, if you put this same data under a microscope you realize that major failures are occurring now more than at other times in history.

Sadly, greed and loss regulations always seem to result in bank failures. Both consumer and government debt is at new heights. All of these factors put strain on the economic system which can lead to failures or loss of faith.

Massive Bank Runs that Changed the Market

There have been thousands of bank failures throughout history. Some of these events have had massive effects on the rest of the market. Among these failures, a couple stands out due to their sheer size and reasons. On the top of the list is the largest bank failures in US history,  Washington Mutual Bank.

In September 2008, Washington Mutual Bank went under due to the issuance of bad loans and lax credit underwriting. The effects of this failure were immediately felt with a selection of other partner financial institutions following suit in the coming weeks. Recently, the second-largest bank in US history collapsed.

Silicon Valley Banks’ collapse this year has been seen as a major red flag for traders in the market. As the second largest bank to ever fail in the US, there are sure to be repercussions within the market. Luckily, unlike past bank failures, users have a variety of new options to consider rather than just a traditional bank. Here is how you can avoid these bank failure issues moving forward.

Its Time to Be Your Own Bank

Thanks to advancements in the blockchain sector and financial markets, it’s now possible for anyone to operate as their own bank. The technology exists that enables direct p2p value transfer. This structure eliminates the need for additional personnel which lowers overhead and improves efficiency.

Decentralization is the Cure

When you look over the history of bank failures, there are common threads that emerge. The people have little to no transparency regarding their bank’s actions. The bank does not need to let people know if its over lending or altering its practices. Bakers don’t tell their clients their reserve amounts or how close they are to reach insolvency.

This lack of transparency has led to the people being the victims in terms of losses. The bank executives always seem to make out in the end with the average client taking the brunt of the losses. Thankfully, the merger of DeFi (Decentralized Financial) has altered the market completely. Today, people can retake control over their finances using advanced technology.

Blockchain banks like META VAULT offer complete transparency via blockchain explorers. These free tools make it simple for people to monitor the health of a financial network. They can see in real-time transactions, balances, and other vital data that only bank employees can access in centralized options.

Eliminate the Inefficiency

Another main advantage of using a direct p2p banking setup is the elimination of inefficiencies. Your local bank is a mountain of inefficiencies. For one, there is little to no reason to have such high overhead. The banks have to charge you such high fees because they need employees, security, cleaning staff, insurance, and much more.

In contrast, DeFi banking can provide much more efficiency. These networks have very low fees because they eliminate the need for personnel. DeFi networks replace key personnel in the financial system, with automated smart contracts. The results are that these systems are faster, less biased, and cost less to operate.

Beat Inflation

Another major reason why Defi is quickly becoming a prime option for savers is the fact that you can select what asset to store your wealth within. When you use a fiat bank account, you are stuck using fiat currency. The USD and EUR are both amid 40-year high inflation which means they make horrible store of value options.

inflation means that savers are losing buying power by saving their assets. You can see this very clearly when you examine the history of fiat currency. Remember, in the 60’s a million dollars was a massive amount that could be enough for multiple people to retire on. Today, the same million is worth around half in terms of buying power.

Better Solution

Worst of all is the fact that inflation can be brought on by so many factors including bad monetary policy. Overprinting during the pandemic is one of the premier reasons why the price of goods and services is up around 30%. A better solution is to use a digital set designed to store value over time like META 1 Coin.

Store Value like a Pro

The introduction of safehaven tokens creates new opportunities for bank users. These stable assets are similar to stablecoins in that they often rely on third-party reserves to remain stable. The META 1 Coin is one of the most popular safehaven tokens in the market today.

This token leverages a basket of gold-related assets to separate its market movements from the rest of the crypto sector. This structure has some major benefits such as better buffering towards gold market fluctuations. Additionally, it provides the token with long-term self-appreciation which makes it the ideal store of value.

Added Ways to Stay Protected

Centralization concerns have always been a problem for digital assets. The traditional financial market has shown that whenever you have a core group of people running the show, the results are going to get skewed in their favor. The same goes for DeFi networks. As such, platforms like META 1 Coin have introduced some unique ways to protect against centralization.

Stop Trading Bots and Firms

The first protection that META 1 introduces blocks corporations and trading bots from the market. This maneuver helps to remove the biggest culprits in terms of market manipulation. Trading firms are known for using shady methods to manipulate the market. Moves such as pumps and dumps result in major losses for the average trader.

Additionally, trading bots can trigger massive sell-offs. These automated trading tools are great for removing human emotion. However, since most users stick with the default settings, there can be certain values that trigger massive sell-offs for bots. Eliminating these protocols from the market helps to better protect long-term savers.

No Bank Runs in DeFi

The MET VAULT DeFi bank features another protection designed to stave off bank runs due to lack of faith or sudden value losses. The network introduces an asset protection system. The system works by requiring all trades to meet the asset value of the token to complete.

Banks will Fail But You Don’t Have too

Now that you understand a little bit more about bank failures, what causes them, and how to avoid the situation, you’re better suited for today’s market. There have been more analysts sounding alarm bells over the rising debt and number of failing organizations. As such, you need to be prepared to leverage new technologies to store wealth when traditional methods fail.

Leave a Reply

%d bloggers like this: