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

QUESTION SIX

As mentioned in another answer, in any given year, we should probably expect at least a few banks to fail. That said, we don’t think most banks will follow the fates of Silvergate, SVB and Signature. Most banks have a lower reliance on uninsured deposits. Although there is not system-wide data on depositor concentration, several of the banks under stress post-SVB released statements about their depositor reliance in order to calm fears about ties to tech/VC and crypto, and to demonstrate the diversity of their depositor base (e.g., First Republic). Most banks have deposits across an array of sectors and individuals, meaning that the likelihood that all of them need the entirety of their money at the same time is lower than what it was for the recently failed banks. Capital ratios are generally in a healthy territory: tier 1 and tier 2 assets (as a share of risk-weighted assets) range from 14% to 19% across bank sizes with the smallest banks (community banks) at the top end of that range (more capitalized). Other capital ratios are also in good condition. Further, and very importantly, the exposure of banks to the kinds of assets that took SVB down are vastly more limited—with smaller banks (the more important for CRE) less exposed. The translation of this is that the smaller the bank, the less exposed to unrealized losses on Treasury and Agency securities. And when viewed relative to capital, these exposures are actually quite limited, particularly those associated with held-to-maturity assets. Yes, some banks have large exposures, but the average bank—especially the average community bank—does not. The reality is that the system is as well-capitalized as it’s been in 40 years with diversified lending and depositors, but no bank can withstand a panic and a run. That is counter to the entire business model. So confidence is key, and this is why regulators responded so swiftly and strongly.

Are more regional banks going to fail?

ANSWER

Hard to say, but most regional banks should not face the same issues as Silvergate, SVB and Signature. However, no bank, no matter how well-managed, can survive a run on deposits.

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

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