Bank Failures Explained: Questions, Answers and How CRE Fits In

QUESTION ONE

Here’s the but: SVB was not the only bank to experience a surge in deposit growth. In fact, the entire banking system experienced unusual levels of deposit growth due to COVID-related stimulus. Recall that the U.S. passed a total amount of stimulus equating to 25% of pre-COVID nominal GDP, and many individuals and businesses parked it in banks. Total deposits grew by 35% from February 2020 to the peak in April 2022. These aren’t SVB levels of deposit growth, but it is the strongest rate of growth since the Federal Reserve began tracking the data in early 1970s. And what did these banks do with their surging deposits? They did what SVB did, but to a much lesser extent; they loaded up on long-term Treasuries and Agency securities in a low interest rate environment. (Compare SVB with 55% of its assets in these securities versus the broader banking system which is closer to 19%.) As interest rates have risen in the last year, the underlying value of those securities has fallen. Thus, there is still some concern with liquidity issues at other banks, but there is also a big “if” attached here. If, for whatever reason, a bank needs to quickly raise capital, they could run into a similar problem; they may be forced to sell Treasuries and/or MBS securities at a loss – which could lead to liquidity or solvency issues, or even another panic. This is one of the reasons policymakers (the Federal Reserve, Treasury and FDIC) responded so aggressively. Here’s the bottom line: This looks more idiosyncratic than it does systemic. There will certainly be other issues in the banking system, but they should not be nearly as problematic, partly because those three banks were unique, and partly because of the strong and fast government response.

The three banks that grabbed the headlines over recent months all had idiosyncratic factors that led to their failure. Here we highlight a few of the unique aspects: • In the case of Silvergate , reacting to a stunning rate of deposit outflows (deposits went from $11.9 billion in September 2022 to $3.8 billion by the end of the year), it drew advances from the FHLB system and then ultimately sold securities at a $718 million loss, wiping out its capital, and announced it would shut down its banking unit. This was not a very large bank, and this failure did not really ‘create the panic.’ Its failure was not noteworthy until SVB, and its resolution does not involve the FDIC. • SVB recorded explosive growth in their deposits during the pandemic (roughly 200% compared to 35% for all commercial banks). A preposterously high percentage of those deposits were uninsured by the FDIC because the account balances of their clients—largely tech and VC firms—were much greater than the $250,000 FDIC threshold. At SVB, 94% of deposits were uninsured versus about 45% for the rest of the banking industry. So, SVB’s heavy concentration of clients within a narrow set of sectors and in uninsured deposits were both atypical. Indeed, SVB was a unique case. Lastly, SVB had unusually high levels of securities on the asset side relative to the broader banking system—an outcome of very poor risk management. SVB is not a good representation of the broader banking sector, but given its size, and following the events with Silvergate, markets started to panic. • Another tale involving heavy exposure to cryptocurrency and other digital assets is that of Signature Bank . Signature also had 89% of deposits above the FDIC threshold, and after the panic created by SVB’s failure, it did not have enough time to come up with liquidity to satisfy depositor withdrawals. Regulators stepped in and put the bank in receivership. Signature was unusual the way Silvergate was—concentration in crypto and high dependence on uninsured depositors.

Were the recent U.S. bank failures unique cases or are they symptomatic of larger problems facing the financial system?

ANSWER

Unique cases, with a but…

Bank Failures Explained - Questions, Answers and How CRE Fits In

3