Over the last few days, the U.S. Government seized two banks after they became insolvent, Silicon Valley Bank and Signature Bank.
Many bank stocks have fallen over the last few days as investors digest the evolving situation.
The Federal Reserve, Treasury, and Federal Deposit Insurance Corporation (FDIC) have made bold moves to prevent further contagion across the banking industry and markets.
We understand these headlines may generate uneasy feelings reminiscent of the Global Financial Crisis of 2007-2008. However, there are some key differences between what happened then and what is happening now.
Let’s talk about what has transpired, what may happen going forward, and the differences between the current situation and that of 15 years ago.
What has happened over the last few days?
The U.S. Government seized two banks when they could no longer meet their financial obligations: Silicon Valley Bank and Signature Bank.
Silicon Valley Bank was the 16th largest bank in the U.S. Immediately before its collapse, the bank held over $210 billion in assets, including $175 billion in customer deposits. This is the largest bank failure since 2008.
The majority of Silicon Valley Bank’s customers were companies in the technology and venture capital world. In addition, many of these customers held large amounts of bank deposits ($250,000+), as opposed to the typical banking customer with smaller deposits.
Flush with deposits from start-ups over the last few years, Silicon Valley Bank did what most banks do. They kept a small portion of their deposits in cash and used the rest to buy long-term bonds such as Treasuries.
As interest rates rose in 2022, the value of the bank’s longer-term bond investments declined. At the same time, start-up funding was starting to dwindle and the bank’s customers began withdrawing money to meet their ongoing obligations. To meet withdraw requests, the bank had to sell its long-term bonds that were at a loss. They did not have sufficient funds to meet all withdraw requests.
Regulators also shut down Signature Bank. Signature Bank had $110 billion in assets and $88 billion in customer deposits.
Similar to Silicon Valley Bank, Signature Bank also did not have a well-diversified depositor base. The bank had a focus on digital assets, becoming one of the few banks to accept cryptocurrency deposits. As of September, almost 25% of its deposits came from the cryptocurrency sector. Customers of Signature Bank swiftly began withdrawing their deposits last week, and the bank was unable to meet the requests.
Though they have not been directly impacted, several other banks have come under scrutiny as being potentially at risk. Some banks have seen large drawdowns in their stock price over the last few days as some investors are panicking.
What did the U.S. Government do to help?
Regulators responded swiftly and boldly with additional policies to help both banks and their customers.
Additional guarantees on bank deposits for customers
Typically, the Federal Deposit Insurance Corporation (FDIC) provides a guarantee, backed by the full faith and credit of the U.S. Government, on bank deposits up to the insurance limit of $250,000 per bank per account registration.
However, Treasury Secretary Janet Yellen instructed the FDIC to make whole all deposits of both Silicon Valley Bank and Signature Bank customers (not just those under the $250,000 FDIC threshold).
This means all customers of both banks will be made whole.
Eased lending rules for banks
The Federal Reserve (Fed) also provided a huge lifeline to banks, introducing a new lending facility called Bank Term Lending Program (BTLP).
This program will make loans to banks, credit unions, and other depository institutions for up to 1 year so they can continue to serve their customers. The Treasuries and government bonds that the banks use as collateral for these loans will be valued at par rather than current market prices. This is important as many of the bonds held by banks are underwater given the negative performance in the bond market over the last year.
This measure prevents banks from taking huge losses if forced to sell these securities to cover withdrawals.
Did the U.S. Government do enough?
One of the goals of the expanded policies is to avert further bank runs and limit the panic among bank depositors and the markets.
The government’s approach is fairly straightforward. The lending program provides a hard backstop against liquidity issues in the banking sector, and the additional FDIC insurance provides customers with reassurance of the stability of their deposits.
With that said, the primary risk of contagion comes from a lack of confidence and irrational fear in the markets. If, despite government intervention, depositors continue to flee the banking system, stability could deteriorate.
Could this happen to other banks?
This is always a possibility. However, it is important to recognize that the risks faced by Silicon Valley Bank and Signature Bank were distinctive to their business model.
Both banks had undiversified client bases with concentrations in the technology, cryptocurrency, and venture capital sectors. When these areas began to see stress, large numbers of depositors began withdrawing their funds. A more diversified customer base helps to prevent these types of situations.
Is this another Lehman Bank situation?
While some of the headlines may feel like those we saw back in 2008, this situation is different.
Unlike in the Global Financial Crisis, when credit impairments on bad mortgages triggered the collapse, the underlying bond investments of the banks are still good. They’ve just lost value given the market environment over the last year.
While these paper losses can transform into permanent losses if banks are forced into a fire sale at inopportune times, Fed action and robust liquidity buffers within the system as a whole limit the risk of contagion.
What does this mean for the markets?
The situation is continuing to evolve. While the government stepped in to prevent further contagion, the market will likely see additional volatility. Regional banks may continue to face headwinds going forward.
One of the biggest questions is how this will affect the Federal Reserve’s plans to continue to raise interest rates in its fight against inflation. Can the Fed continue to raise interest rates given these latest developments?
Less than a week ago, investors were implying a 70% chance of a 0.50% interest rate hike at the upcoming Fed meeting on March 22nd. The market is now expecting a 0% to 0.25% increase at the next meeting. This may be the “Fed pivot” that investors have been waiting for.
Calm and confidence
Domani Wealth partners with its clients to help provide confidence in their financial future, and calm when changes occur. Working with us, you can feel supported and in control. If you’d like to learn more about our approach to financial or retirement planning, ask a question, or get a second opinion on some financial choices, we’re always here and ready to start a conversation. You can call us at 855-855-5455, get in touch with one of our team members, or email us at firstname.lastname@example.org.
Sources: Bloomberg, Reuters, Forbes, Wall Street Journal