Bank troubles: Serious worries, reassurances after SVB, Signature failures, Credit Suisse problems

The failures of tech-oriented Silicon Valley Bank (with $209 billion in assets) and crypto-heavy Signature Bank ($110.4 billion in assets) were the second and third largest in U.S. history behind only Washington Mutual’s $307 billion 2008 demise. Crypto-focused Silvergate Capital also announced it was shutting down March 8 before the SVB and Signature failed on March 10 and 12, respectively.

Venture capitalists and tech sector advocates argued that if the Federal Deposit Insurance Corp. did not cover SVB and Signature accounts above the usual $250,000 Federal Deposit Insurance Corp. threshold there would be additional runs on regional and other banks.

The FDIC and U.S. Treasury Department on Sunday said they would cover businesses and wealthy accounts at the two banks paying for the financial relief with insurance fees paid by other financial institutions.

The Federal Reserve Bank is also offering $25 billion in assistance to struggling banks with President Joe Biden making pronouncements of support for the U.S. financial sector Sunday evening and then again Monday morning before jittery stock markets opened March 13.

“Every American should feel confident that their deposits will be there if and when they need them,” Biden said from the White House before Monday’s opening bell on Wall Street.

Still, there are concerns about more bank troubles and money flowing from smaller and regional banks to larger financial giants (such as Bank of America, JPMorgan Chase and Citigroup). On Wednesday, European and U.S. stock markets were shaken by troubles with financial giant Credit Suisse.

Community banks

Big U.S. banks and the FDIC did not respond to requests for comments about how much money and capital have moved from regional and smaller banks to larger institutions in the ‘systemically important ‘category. Those ‘too big to fail’ banks go through more financial stress tests than their smaller counterparts.

At the local level, some community banks see the situation as an opportunity to bolster their local customer ties and reassure existing customers of their local strength beyond all the stresses from Wall Street, Washington and Silicon Valley.

“There is not a run here,” said Scott Beatty, president and CEO of Shore United Bank on Maryland’s Eastern Shore. The bank, which also serves the Annapolis area, has assets of $3.5 billion and deposits of $3 billion.

Beatty said Shore United actually gained $40 million in deposits in the days after the SVB and Signature failures.

“I know some of the money might have come from Signature,” said Beatty, referring to the New York-based bank that was seized by the FDIC and state regulators.

Beatty said the recent failures are outliers and does not see parallels to the financial and real estate crisis in 2007 and 2008.

“Signature and SVB are not your typical community banks. They both had their niches,” he said, referring to the crypto and technology focuses.

Beatty said the situation is an opportunity to strengthen local ties and customer bases. “We know our customers,” he said. “They’re mom and pop stores. We’re their bank of choice.”

Across the country, in Wyoming, Justin Lamboley, president of Cheyenne State Bank, said he was expecting calls from account holders and customers on Monday after the bank failures and dire warnings from venture capitalists and tech investors of runs on regional banks if large SVB accounts, many of them in the tech sector, were not made whole.

“We had zero questions,” Lamboley said in a March 14 interview. The bank has $50 million in assets.

He said CSB’s model is hyper local.

“Our shareholders and our customers know we are concentrated in and around Cheyenne. We take local deposits. We make local loans,” Lamboley said. “All our decisions are made locally.”

He said that results in same-day business and other loans and real estate deals completed in a week. Lamboley, said the situation is an opportunity for community banks to assure existing and new customers of their financial footing and fiduciary cultures.

“For us, this is a kind of way to get out that small, local community banks are strong. This is really where your money should be if you don’t want to worry about investment risk at the larger institutions,” Lamboley said.

One of the narratives after the SVB and Signature failures was that wealthy and business interests would move their money to the largest U.S. banks — such as Chase and Bank of America — especially if accounts of more than $250,000 were not covered by the FDIC.

More troubles ahead?

The financial realm is not out of the potentially harrowing woods. That showed itself with stock market turbulence and slumps Wednesday over concerns about Credit Suisse and potentially additional troubles at other banks.

FDIC Chairman Martin Gruenberg foreshadowed the looming situation on March 6 just days before the failures.

“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies. First, as a result of the higher interest rates, longer term maturity assets acquired by banks when interest rates were lower are now worth less than their face values,” Gruenberg told an industry conference. “The result is that most banks have some amount of unrealized losses on securities. The total of these unrealized losses, including securities that are available for sale or held to maturity, was about $620 billion at year end 2022. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry.”

On Thursday, March 9, depositors withdrew $42 billion from Silicon Valley Bank — the biggest bank run in U.S. history.

”The U.S. government’s decision to backstop all deposits of SVB and Signature regardless of their size should make it less likely that banks with less cash and more securities on their books will face a liquidity shortfall because of massive withdrawals driven by sudden panic,” said Vidhura Tennekoon, an assistant professor of economics at Indiana University, in a March 13 analysis. “However, with over $1 trillion of bank deposits currently uninsured, I believe that the banking crisis is far from over.”

Reassurances

State banking groups have also sought to reassure customers that 2023 was not going to be a repeat of 2008 — or 1929.

”The banking system overall and Wyoming banks are safe, sound and resilient. This situation is truly idiosyncratic to SVB,” said Scott Meier, president and CEO of the Wyoming Bankers Association in a statement. “It grew rapidly in the span of 18 months from $50 billion to over $200 billion, which is unheard of. No Wyoming bank has grown like this. So, while Silicon Valley Bank had reached the large bank category, it achieved that status so quickly that the bank was not in the large bank asset size long enough for the regulators to push through all the requirements (like stress testing).”

Cary Hegreberg, president of the Montana Bankers Association, also stressed that hometown and home-state financial institutions are different breeds than the banks that collapsed in California and New York.

“Our banks are not leveraged into specialized risk areas like Silicon Valley Bank. Deposits are from people in the community and local companies. Loan portfolios are diverse serving a broad cross section of industries and businesses,” Hegreberg said of the state’s 37 banks.

He said local banks now face a reality of higher FDIC insurance premiums and fees to pay for the SVB and Signature bailouts. That could impact their costs of loans and financing that could also be passed onto customers.

There is still also dust to settle with SVB (and a potential buyer) and where businesses and high-income earners might move money and financial assets.

“There’s definitely money moving around,” Hegreberg said.

Regional banks, including First Republic Bank and others, continue to face questions about financial conditions and deposit outflows after technology investors pushed for a full SVB and Signature bailout warning of Great Depression-like bank runs unless all accounts were covered.

Western Alliance Bank President and CEO Kenneth Vecchione said in a statement March 13 that the Phoenix-based regional bank has more than $25 billion in cash reserves and “deposit outflows have been moderate.”

A spokesperson for Fifth Third Bank said the Ohio-based financial institution “has none of the issues that are impacting some of the technology-focused banks.”

”We are in a position of strength, with a strong balance sheet — capital, liquidity, securities positioning, and granular and stable deposits which have continued to grow,” said spokesperson in a statement.

What happened and what’s next

Beatty blames the government and its reactions to inflation for setting up some of the banking stress.

“This is the government’s doing in my view,” said Beatty, pointing to recent interest rate hikes by the Fed to combat inflation as putting stress on ba securities holdings.

The Fed was first blamed for not reacting to 40-year highs with inflation after all the monetary and fiscal infusions of the COVID-19 pandemic and now faces scrutiny for increasing rates resulting in banks taking investment losses.

Lawmakers, including U.S. Sen. Jon Tester (D-Montana) and regulators also want answers about how SVB and Signature failed with Democrats eyeing increased regulations and bringing back some banking rules eased during the Trump administration.

“No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” U.S. Sen. Elizabeth Warren, D-Massachusetts, said in an opinion piece on the failures, referring to 2018 rollbacks of some Dodd-Frank financial regulations.

Biden also said he will push for increased regulations after the failures and Trump-era rollback. “I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses,” Biden said.

The regulatory efforts face some industry pushback.

”At this point, the failures of SVB and Signature Bank appear to reflect primarily a failure of management and supervision rather than regulation,” the Bank Policy Institute, an industry association, said in a March 14 statement.

”Both banks grew rapidly and invested a significant portion of their assets in long-term government securities, which left them heavily exposed to interest rate risk. Federal Reserve rate increases triggered large unrealized losses, which in turn undermined confidence in the banks. Then, because an unusually (to put it mildly) large portion of their deposits were uninsured, a run by those depositors caused each bank’s failure. At SVB, panic was exacerbated by the fact that many companies that were lending customers of the bank had been required to hold all their deposits there, and so were at mortal risk in the event that the bank failed,” the BPI statement continued.