Is Your Bank At Risk After the Silicon Valley Bank Failure?
By Floyd Saunders, Founder at Really Simple Investing
The failures of Silicon Valley Bank in California and Signature Bank in New York have added new bumps in the road if you are thinking about your financial well-being in 2023.
Both lenders were shut down by regulators and the FDIC had to step in to protect depositors. But now there is more.
A day after labeling Signature Bank’s debt as “junk” and placing six regional banks under review for downgrades,
First, the closure of Silicon Valley Bank should be viewed as an isolated event. However more banks are being flagged as possibly being at risk. And Moody’s the corporate credit rating agency is starting to flag some banks for possible credit downgrades, never a welcome sign by bank management.
Moody’s, a credit rating agency for corporate bonds has cut its outlook for the entire US banking system from stable to negative. The rating firm cited the sector’s “rapidly deteriorating operating environment”. This might be a bit of an overreaction, but several years ago with the market crash of 2008-09, Moody's missed this risk the to banking system, so they may be acting with more care now.
How Silicon Valley Bank Failed
Management at Silicon Valley Bank made a key mistake, not anticipating the effect of rising interest rates on their portfolio of long-term government bonds and a concurrent contraction in venture funds investing in startups.
When tech startups come to SVB, as a condition of lending them money, the startups are required to do all their banking with SVB. Over the years Silicon Valley Bank built its business around providing funding to startups and selling them cash management, payroll and payment services. SVB is the only bank for more than 40% of tech startup companies.
Silicon Valley Bank (SVB) has long been a profitable bank. They made money by lending to tech startups. Lending was solid. Credit losses were fairly low. Tech founders turned to SVB for mortgages, car loans, lines of credit, payment processing and a variety of other banking services.
Deposits at SVB tripled from 2019 to ‘21. You would think that was a good thing. Most banks like to see deposits grow, it’s a cheap source of funds to make loans.
But that is actually a problem, when the demand for offsetting loans dries up, and that started happening this year.
When banks accept deposits from clients, those deposits are liabilities to the bank. To make money from those liabilities, banks lend money to customers. For years, Silicon Valley Bank was good at this, as the technology sector was growing and there were lots of startups needing a friendly banker.
But when a bank can’t lend deposits responsibly, it often adds assets by purchasing more US Treasuries, considered a very safe investment.
The problem is bank deposits are often short-term. Depositors may claim their money at any time. Traditional banks, simply liquidated US treasuries to meet any demands on the deposit base.
BUT, SVB made a classic mistake, it bought long duration, often 10+ year bonds.
As the Federal Reserve started raising rates in 2002 and into 2023, those long term bonds are less desired and they lost value in the market for buying and selling treasuries.
Those losses, multiplied through the leverage at SVB, caused a the problem.
When depositors started to ask for their money all at once, it created a run on the bank. SVB could not cover the demand by selling billions in bonds quickly, and couldn’t sell them at a profit.
At Bank of America for example, deposits have grown by 15 billion dollars in just a few days after the closure of SVB.
Plus, those large depositors aren’t fully insured by the FDIC - so once they started pulling those large deposits you have a classic bank run.
Silicon Valley Bank couldn’t sell assets or raise more capital quickly and the bank regulators step in to close the bank. That causes consumers and businesses in general to start looking at their own bank and how much they have on deposits.
What banks are in trouble?
Depositors in other regional banks have reacted by moving deposits out of many banks that don’t have the same risks as SVB, but depositors saw a risk. Here are some of the banks in trouble:
Regional banks were especially impacted as the stock market opened trading in the days after SVB failed. These bank stocks had trading in their shares halted at least briefly: Signature Bank (It was then closed by regulators), First Republic Bank, Western Alliance Bancorporation, PacWest Bancorp, Bank of Hawaii, Metropolitan Bank, Macatawa Bank, Zions Bancorporation, Customers Bancorp, and East West Bancorp.
So if you are an investor or hold deposits at these banks you should be watching to make sure deposits are at the FDIC limits for insurance.
First Republic Bank shares plummeted 75% when the stock exchange opened the Monday following SVB’s closure, with trading in the stock paused due to the sharp decline in stock price, even after the bank received rescue liquidity from the Federal reserve and JPMorgan Chase on Monday. The funding raises the bank’s unused liquidity to $70 billion.
Early this past week:
Comerica Bank, a Dallas, Texas-based financial institution, saw its shares plunge 30%.
KeyCorp, which operates KeyBank, saw a similarly steep decline, falling 28%.
First Horizon shares were down over 20%, and trading was paused.
In my view, the share prices of all of these banks are very likely to quickly recover as none of these banks are actually in trouble and the FDIC, the FED and Treasury departments will step in to protect depositors.
All of these banks are covered by FDIC insurance, so depositors who are within $250,000 are not at risk even in the unlikely event more banks do fail.
The largest banks are in a stronger position now because of new rules imposed after the financial crisis, including higher capital requirements and annual stress tests.
Last year, all of the largest banks passed, but Moody’s said that new concerns are surfacing. The Trump administration and congress removed this requirement for many of the banks now at some potential risk of being seeing credit downgrades.
What should consumers be doing now?
Consumers should make sure they are banking with an FDIC-insured bank and checking their balances to be within the FDIC’s limits and that they’re following the FDIC’s coverage rules—so that their money is protected.
What are those rules?
Depositors should use the tools available from the FDIC. BankFind Suite, the electronic deposit insurance calculator (EDIE), and FDIC’s phone number (1-877-275-3342) are available for consumers. Use them to choose a financial institution to store your savings.
You can search your bank by name in FDIC’s BankFind Suite and use EDIE to confirm you’re within FDIC limits.
It can be a good idea to have multiple accounts at different banks, and especially if you have over $250,000 in cash.
Bigger money center banks like JPMorgan, Bank of America and Citibank are going to be safer for larger deposits than a local community bank.
The mid-size and community banks aren’t the only ones impacted by the market’s concerns about the health of financial institutions. Charles Schwab plummeted 30% in the past five days, and Bank of America fell 14% in the days after the failures at Silicon Valley Bank and Signature Bank. But you can expect the share prices at both institutions to rebound as this run non banks gets contained.
In short, it is a good time to review where you have you money and how much you have on deposit.