Bank failures dramatically impact the American financial landscape, sending ripples through the economy and affecting everything from the security of depositor’s savings to the stability of financial markets.
We’ll discuss the largest bank failures in U.S. history. Let’s explore what a bank failure is, highlighting significant instances where financial institutions could not withstand economic pressures or poor management, leading to their collapse.
We’ll take a closer look at nine notorious cases. Each failure story provides insights into the vulnerabilities and challenges within the U.S. banking system, from regulatory oversight to the impact of interest rates and economic downturns.
Let’s uncover the stories behind the most significant bank collapses in American history and consider what lessons can be learned to safeguard the future of banking in the U.S.
What Is a Bank Failure?
A bank failure occurs when a financial institution cannot meet its obligations to depositors and creditors, leading to its closure by government regulators. This typically happens when a bank’s assets, like loans and investments, lose value, and it can’t cover the withdrawals requested by depositors or pay back its debts.
In the U.S., the responsibility of closing a failing bank and managing the aftermath falls to the Federal Deposit Insurance Corporation (FDIC). This government agency insures deposits and maintains the stability of the banking system.
When the FDIC steps in, it usually does so with two primary goals: To protect insured depositors and to minimize the cost to the Deposit Insurance Fund, which is funded by premiums paid by banks and savings associations.
The FDIC may facilitate a sale of the failed bank’s assets to a healthier institution, set up a bridge bank to ensure continued access to banking services for depositors, or directly reimburse insured deposits up to the legal limit, currently $250,000 per depositor, per insured bank, for each account ownership category.
Bank failures can have profound implications for the affected bank’s customers, employees, broader financial system, and economy. They can erode public confidence in the banking sector, potentially leading to bank runs on other institutions perceived as vulnerable.
Failures often highlight broader economic and regulatory challenges, such as problematic lending practices or economic pressures like those seen during the financial crisis or in periods of rapid interest rate changes.
Understanding bank failures is essential for recognizing the signs of financial distress and the importance of regulatory oversight and prudent management within the banking industry. It also underscores the role of the FDIC and the Federal Reserve in safeguarding the U.S. banking system against systemic risks and in promoting financial stability.
What Are the Nine Largest Bank Failures in U.S. History?
Here are the nine largest bank failures in U.S. history, each a story of miscalculation, economic shifts, or regulatory lapses, impacting everything from local communities to global financial markets.
1. Washington Mutual Bank (2008)
Washington Mutual Bank’s collapse in September 2008 is considered the largest bank failure in U.S. history. This seismic event was a direct fallout of the subprime mortgage crisis. At its failure, Washington Mutual had assets valued at approximately $307 billion, making the scale of its downfall severely impactful.
The bank’s aggressive expansion into the housing market, particularly its heavy investment in high-risk mortgage securities, left it highly vulnerable when the real estate bubble burst. The ensuing panic among depositors led to a massive bank run, with over $16 billion withdrawn in just ten days before regulators stepped in.
The FDIC facilitated the sale of most of its operations to JPMorgan Chase & Co., seeking to stabilize the banking system and protect depositors. This failure highlighted the critical weaknesses in the banking sector’s regulatory framework and risk management practices, prompting a reevaluation of banking laws and leading to significant reforms aimed at preventing future crises.
Washington Mutual’s downfall marked a pivotal moment in the 2008 financial crisis and also served as a cautionary tale about the dangers of excessive risk-taking by financial institutions.
2. First Republic Bank Corporation (2023)
The First Republic Bank was an expansive financial entity boasting $229 billion in assets prior to its collapse in 2023. Considering the bank’s extensive assets and previously perceived stability, this unforeseen failure sent shockwaves through the banking industry.
Direct impacts were felt by a broad spectrum of individuals and enterprises, spanning regular account holders, significant investors, and affiliated businesses. The collapse of an institution the size of the First Republic Bank in 2023 accentuated the potential vulnerabilities within the banking system, serving as a stark reminder of the inherent risks involved in financial investing and the importance of widespread regulatory measures to safeguard against such occurrences.
The impact of this event continues to resonate, spurring ongoing analysis and considerations toward enhancing financial and banking sector stability.
3. Silicon Valley Bank (2023)
Silicon Valley Bank, with $209 billion in assets, faced an unexpected failure in 2023. Known for its vast resources and essential role within the tech industry, the bank’s collapse sent a ripple effect of concern and uncertainty throughout its wide client base, from startups to major tech players.
This event not only resulted in financial losses for depositors and investors, but it also triggered larger concerns about the strength and security of the banking industry. This unforeseen downfall of Silicon Valley Bank led to considerable analysis and review within the sector, highlighting the need for strong risk management and sound regulatory oversight to safeguard the financial system and the economy as a whole.
4. Signature Bank (2023)
Another victim of the banking crisis in 2023, Signature Bank, with a notable $110 billion in assets, suffered a surprising collapse.
Prior to its failure, Signature Bank was a prominent fixture in the banking industry, rendering its downfall a significant event that had widespread implications. Its customers, ranging from private clients to businesses, were adversely impacted, catalyzing concerns about the overall financial stability and security in the banking sector.
The collapse of such a sizable entity underscored the necessity for rigorous regulatory procedures and effective risk management strategies within the industry. The failure of Signature Bank in 2023 continues to be a pivotal point of discussion and analysis of the events that took place in the banking industry this year, profoundly shaping prevention and mitigation measures in the financial industry still today.
5. American Savings and Loan Association (1988)
The collapse of the American Savings and Loan Association in 1988 was a pivotal moment in the savings and loan crisis of the 1980s. This financial institution, once one of the most significant savings and loan associations in the United States, faced bankruptcy due to risky real estate investments, high interest rates, and regulatory failures. With total assets of approximately $30.2 billion at its failure, it marked a significant loss in the financial sector.
The federal government had to intervene, with the Federal Savings and Loan Insurance Corporation (FSLIC) facilitating a complex and costly bailout.
This failure underscored the vulnerabilities within the savings and loan industry and contributed to a broader financial turmoil that led to restructuring regulations and oversight in the banking industry.
The American Savings and Loan Association’s collapse highlighted the risks of speculative investments and the need for strict financial oversight, lessons that resonate in today’s banking sector.
6. Continental Illinois National Bank and Trust Company (1984)
The 1984 collapse of the Continental Illinois National Bank and Trust Company remains one of the biggest bank failures in U.S. history, marking a pivotal moment for the banking industry and regulatory practices.
As the seventh-largest bank in the nation at the time, Continental Illinois’s failure was primarily due to its extensive involvement in purchasing low-quality loans from the oil and gas industry, which became problematic due to volatile commodity prices and risky lending practices.
This misstep resulted in significant losses and a crisis of confidence among depositors and creditors, leading to a liquidity crisis. The FDIC intervened with a rescue effort, signaling the bank as “too big to fail.” The government’s intervention included securing all deposits, even those exceeding the insured limit and a significant capital injection.
With assets nearing $40 billion, its failure sent shockwaves through the financial markets, underscored the dangers of concentration risk, and led to widespread reforms in banking supervision and the concept of systemic risk. Continental Illinois’s collapse fundamentally changed how regulators approached banking crises, setting a precedent for future bailouts and regulatory frameworks.
7. IndyMac Bank (2008)
IndyMac Bank’s failure in July 2008 was one of the early signals of the looming financial crisis that would soon grip the United States. Based in California, IndyMac specializes in mortgage lending, including many high-risk loans. When the housing bubble burst, it exposed the bank’s unsustainable lending practices, leading to a massive default on its mortgage portfolio. The bank had assets totaling around $32 billion at its collapse, making its failure one of the largest in U.S. banking history.
The fallout from IndyMac’s failure was profound, fueling a nationwide panic about the stability of other financial institutions and exacerbating the financial crisis. The FDIC took control of IndyMac, marking a significant moment in the government’s efforts to stabilize the banking sector.
This event underscored the need for more stringent oversight and regulation of mortgage lending practices.
8. Colonial Bank (2009)
Colonial Bank’s failure in August 2009 marked one of the most significant bank collapses during the Great Recession, symbolizing the fragility of financial institutions in the face of a housing market crash and economic downturn.
With about $25 billion in assets at its downfall, Colonial Bank became the sixth-largest bank failure in U.S. history. The collapse was primarily due to its heavy investment in real estate loans, which became precarious as the housing bubble burst and foreclosure rates soared. Fraudulent activities, including a two billion dollar scheme involving the bank’s mortgage warehouse lending division, further destabilized Colonial. The FDIC stepped in to protect the FDIC-insured depositors, arranging for BB&T to assume all deposits and most assets.
9. Downey Savings and Loan (2008)
Downey Savings and Loan, once a prominent player in the banking sector, faced collapse in 2008 amidst the Great Recession. With a focus on mortgage lending, Downey was significantly exposed to the downturn in the housing market, leading to an unsustainable number of loan defaults and foreclosures.
The bank’s failure directly resulted from its aggressive expansion into risky loan products, such as adjustable-rate mortgages, which became problematic as interest rates reset higher and the real estate bubble burst. The FDIC took Downey into receivership, and its assets, valued at about $12.8 billion, were sold to U.S. Bank.
This event underscored the vulnerabilities of the U.S. housing market and banking system, prompting more rigorous regulatory oversight to prevent future crises. Downey’s collapse affected the local communities and depositors and contributed to the broader financial instability that marked the period.
The Bottom Line
The stories of these significant bank failures underscore the vulnerabilities and challenges within the U.S. banking system, from economic shifts to regulatory oversights. These episodes serve as cautionary tales, reminding us of the importance of diversification and stability in our financial strategies.
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Sources:
About the Federal Deposit Insurance Corporation (FDIC) | FDIC
Washington Mutual (WaMu): How It Went Bankrupt | The Balance Money
Too Big to Fail: The Story of Continental Illinois… | Newberry Library
The collapse of First Republic Bank | Financial Times
10 years ago: IndyMac collapses and starts a flood of bank failures | CNN
