The abrupt collapse of the nation's 16th largest bank sent shudders throughout the industry. Fears escalated after the crisis spread to other institutions, raising the specter of a banking contagion. The instability is raising questions about the safety and liquidity of all banks, both in the U.S. and overseas.
The chain reaction began after Silicon Valley Bank received a visit from Moody's Investors Service on March 2. Moody's team informed the bank it was considering downgrading the bank's rating. SVB moved quickly, announcing it was raising $1.75 billion in capital on March 8.
The news sent the bank's stock in a tailspin as investors worried about the institution's solvency. Panicked customers began withdrawing deposits at lightning speed. In a last ditch effort to save the bank, executives sold $21 billion worth of long-term securities at steep discounts.
Less than two weeks before the looming failure, SVB executives sold millions of dollars in company stock, according to filings. Chief Executive Officer Greg Becker unloaded $3.5 million in SVB stock. He wasn't the only top brass to act. Chief Financial Officer Daniel Beck dumped $575,180 in shares.
Insiders knew the bank was doomed. Likely, bank chatter leaked to major depositors who spurred the run. On a single day, March 9, clients withdrew $42 billion in deposits. When SVB ran out of funds, regulators stepped in and shuttered the 40-year old bank, making it the largest bank failure since the 2008 financial upheaval.
Silicon Valley, a darling of the tech start-ups, catered to venture capitalists, entrepreneurs and the wealthy. Newly minted businesses looking for investors ran into the welcoming arms of SVB bankers. The bank featured a blue-ribbon board, many with political connections to Democrats.
Unlike traditional commercial banks, nearly 95% of SVB clients had deposits of more than the $250,000 limit guaranteed by the Federal Deposit Insurance Corporation (FDIC). The bank's dependence on outsized, uninsured deposits meant a turbulent run would put the institution in jeopardy faster than most banks.
After regulators assumed control of the bank, it became clear mismanagement wrecked the institution. Executives stowed deposits in long-term assets, including U.S, Treasury notes and bonds. Asset values plummeted as interest rates rose. The sinking values created a classic asset-liability mismatch.
Bank executives failed to hedge the risks inherent in their low yielding asset holdings. This would have given the bank some protection on its bond portfolio. But the bank's chief risk officer, who presided over the bond-buying spree, left in 2022 with a $7.1 million severance package, according to SEC filings.
For eight months, the bank operated without a risk officer, whose responsibility includes analyzing the institution's exposure to portfolio risks and assessing the bank's ability to weather adverse scenarios. As current market value of the bank's bond portfolio dipped, executives should have acted quicker to bolster capital.
The FDIC swooped in and announced it would guarantee clients deposits, including those that exceded the government insured $250,000 limit. This was good news for large tech clients, such as Etsy, Rocket Labs and Roku. However, bailing out uninsured deposits set a worrisome precedent.
Following the SVB demise, Signature Bank in New York crumbled. At the time, the FDIC had a total of $128 billion in its insurance fund. Those reserves could not accommodate many more bank hiccups.
Treasury Secretary Janet Yellen hoped the bailout of depositors at both institutions would stem the banking turbulence. She stepped into the breach, assuring the country the banking system was safe. Yellen appeared to signal the FDIC would continue to bailout uninsured deposits before later hedging.
As bank stocks and the overall markets nosedived, President Biden tried to soothe the public's growing fears about banks. Then Silvergate Bank, a crypto friendly institution, succumbed. Panic soon ensnared regional banks, including First Republic Bank. Eight banking behemoths, led by JP Morgan Chase, shipped $30 billion in cash to avoid a liquidity catastrophe at First Republic.
Republic's upheaval triggered anxiety among customers of regional and community banks. Federal Reserve data shows that deposits at small banks--defined as those smaller than the biggest 25--dropped $119 billion. Meanwhile, deposits at large institutions soared $67 billion in the week ended March 15.
Fleeing clients forced Charles Schwab, which operates the nation's tenth largest bank, to reassure its client base. The move was critical after Schwab disclosed it had $11 billion in unrealized losses on its bond portfolio. It was a sign that size no longer matters when 20% of your customers yank deposits.
Frantic bank customers plowed $5.4 trillion in deposits into money-market mutual funds, the fastest pace since the start of the pandemic. As deposits dwindled at a rapid clip, a stampede of banks borrowed an average of $117 billion each day for a week from the Federal Reserve's discount window.
When the crisis spread overseas to 167-year-old Credit Suisse Bank, Switzerland, and Germany's largest bank, Duetch Bank, it heightened concerns of a full-blown global banking pandemic. Reassurances are being drowned out by the realities of banks failure to adjust for portfolio risks.
Jittery Americans with bank deposits began to wonder aloud: "Could this contamination spread to my bank?"
"No bank is immune from a deposit run. I can say that unequivocally," says Howard Manning, a former Federal Reserve bank examiner whose career in the banking industry spans five decades. "Banks cannot turn illiquid assets fast enough regardless of size. We're going to see more turmoil."
Some in Congress, most notably Massachusetts Senator Elizabeth Warren, are blaming the bank debacle on Federal Reserve Chairman Jerome Powell, who has overseen a regime of steady interest rate hikes. Manning calls the senator's criticism disingenuous, since Warren voted for trillions in federal spending, fueling runaway inflation,
"The Fed signaled in 2022 that it would have to begin raising interest rates," Manning reminds. "From that point onward, banks and financial institutions should have been hedging their long term assets. Bankers should have written down the value of bonds as interest rates rose. It was total mismanagement."
Whether you agree with the pace and timing of Powell's interest rate hikes, the Fed can hardly be blamed for addressing blazing inflation. Trillions of dollars in federal spending forced the Fed's hand. All that money sloshing around the economy triggered too many dollars chasing too few goods.
The fallout of the banking plague will hit every American. With FDIC reserves dwindling, banks will be on the hook for higher insurance premiums. Institutions will pass along those costs in the form of increased fees to customers. You will be paying for the bailouts, irregardless of the claims to the contrary by Yellen and Biden.
Americans, especially small businesses and entrepreneurs, will find it more difficult to secure bank loans on favorable terms. Banks inevitably will implement more stringent lending standards to protect capital. The result will be a slowing of an already wobbly economy.
Management mistakes usually are the culprit when financial institutions go belly up. Blaming the Federal Reserve is a cop out. Bank examiners, especially those at the San Francisco Fed, also are accountable for not raising alarms sooner. But the financial system is showing some cracks.
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