Final answer:
Silicon Valley Bank and Signature Bank in the US recently faced failures due to risky lending practices, inadequate risk management, and economic downturns. The liquidity and deposit insurance issues contributed to the challenges faced by the banks. While not all deposits may be completely safe, the majority of depositors are likely to receive their money back through the deposit insurance system.
Step-by-step explanation:
Silicon Valley Bank and Signature Bank are two banks in the United States that experienced recent failures. Silicon Valley Bank is headquartered in Santa Clara, California, and primarily operates in the technology and venture capital sectors. Signature Bank is based in New York and focuses on serving commercial clients.
The banks failed due to a combination of factors, including risky lending practices, inadequate risk management, and economic downturns. In the case of Silicon Valley Bank, its heavy exposure to the technology sector contributed to its downfall. Signature Bank faced challenges related to loans in the taxi medallion market.
The mismatch between assets and liabilities, also known as a liquidity mismatch, played a role in the failures. Both banks had investments that became illiquid or lost value, causing their liabilities (deposits) to exceed their available assets.
Regarding the issue of liquidity, both banks faced difficulties in meeting depositors' withdrawal demands when their assets became less liquid. This lack of liquidity compromised the banks' ability to fund operations and caused further financial instability.
Deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) protects depositors' funds up to a certain limit in case of bank failures. Not all deposits in failed banks are necessarily safe, as the FDIC insures individual deposits up to $250,000 per depositor. Any amount exceeding this limit may be at risk. However, the majority of depositors are likely to receive their money back through the deposit insurance system.