During the past 10 days we’ve watched the second and third-largest U.S. bank failures, Silicon Valley Bank and Signature Bank, roil financial markets amid fears of a broader meltdown.

In both cases, depositors with large uninsured funds became concerned, started pulling their money out, and a full run on the two banks followed, prompting federal intervention. Concerns about the health of other U.S. banks, including First Republic, and overseas lenders, including Credit Suisse in Switzerland and Italian banks UniCredit and Intesa Sanpaolo, quickly followed. 

The Federal Deposit Insurance Corp. protects customers of U.S. banks with $250,000 of insurance per depositor, per bank, on savings, checking, money markets and CDs. Depositors at credit unions are similarly protected, through the National Credit Union Administration.

In the two recent bank failures the government dramatically and controversially announced that even their uninsured deposits would be made whole, a move aimed at containing threats to the banking system.

Certainly, those with no more than $250,000 in any one bank or credit union should rest assured their money is safe. The broader concern is the impact on the larger economy from yet another banking crisis.

A failure of financial institutions precipitated the 1990-91 recession (the savings and loan crisis) and the calamitous 2007-09 Great Recession, when home prices plunged and unemployment soared.

Goldman Sachs now estimates there’s a 35 percent chance of a U.S. recession in the next 12 months, up from 25 percent, because the two failures this month could prompt smaller banks to become more cautious with lending, and J.P. Morgan predicted a reduction in gross domestic product for similar reasons, multiple news outlets reported.

It’s also worth knowing that the S&L crisis, the mortgage lending crisis and the failure of Silicon Valley Bank all followed deregulatory federal action. Expect to hear much debate about that going forward, including the 2018 law that excluded banks of SVB’s size — it was the 16th-largest U.S. bank — from more stringent “stress test” rules.

The memory of lenders slamming on the brakes during the Great Recession is still pretty fresh. On the other side of the scale, financial markets now think the Federal Reserve could ease up on interest rate hikes.

Which brings us to government bonds — one of the safest places to put money, until it’s not.

One of the large factors pressuring the two banks that failed — along with poor risk management and questionable regulatory oversight — were the reserves they had invested in government bonds.

The thing with federal bonds is, you can’t lose money if you hold them to maturity. But, if interest rates rise and a bond is sold before its maturity, the buyer could take big losses because the price of existing bonds drops when newer bonds offer investors higher interest rates.

That means the market value of government bonds held by banks has taken a big hit, which shouldn’t be a long-term problem, but when depositors suddenly pull their money out, that’s another story.

“That required selling typically safe bonds at a loss, and those losses added up to the point that Silicon Valley Bank became effectively insolvent,” the Associated Press reported.

One lesson here for individual savers and investors is that there’s a big difference between buying bonds and investing in a bond fund. Bond funds, in a rising interest rate scenario like the one we’ve been experiencing, can fall.

If you put $10,000 in a U.S. total bond market fund a year ago, or even three years ago, you’d have less money today. The same money in an individual bond, or an inflation-protected i-bond, would be safe until maturity and earning interest.

That’s not to suggest long-term investors should avoid bond funds, but it’s important to know how they work when interest rates are rising.   

Reach David Slade at 843-937-5552. Follow him on Twitter @DSladeNews.