Prior to March 10, 2023, many of us were not aware of Silicon Valley Bank (SVB) or, for that matter, Signature Bank, New York. But, thanks to high-profile events involving both banks, now we are. Every day since that fateful day, I was inundated with e-mails, texts, news articles, and memos concerning the failures of the two banks.
What happened and how serious are these events going forward? On March 10, Silicon Valley Bank, based out of Santa Clara, California, with $209 billion in assets as of year-end 2022, was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. Two day after the failure of SVB, Signature Bank, New York, with $110 billion in assets at year-end 2022, was closed by the New York State Department of Financial Services, which also appointed the FDIC as receiver.
In an abundance of caution and with concern about an economic spillover from the failures, on March 12, the Secretary of the Treasury, upon unanimous recommendation of the boards of the Federal Reserve and the FDIC, approved systemic risk exceptions for the failures of SVB and Signature. This enabled the FDIC to guarantee all of the deposits of both banks. I should note that shareholders lost their investment and unsecured creditors took losses. The boards and most senior executives were removed. In addition, the Federal Reserve, with Treasury’s approval, created a temporary lending facility, the Bank Term Funding Program, to allow banks to receive additional liquidity to meet unexpected depositor demand. The program allows banks to borrow against Treasury and agency securities at par for one year. Including other sources of liquidity such as discount window lending, the new program will provide ample liquidity for the banking system.
It is important to note that any losses to the FDIC’s Deposit Insurance Fund as a result of uninsured deposit insurance coverage will be repaid by a special assessment on banks. The FDIC estimates that the cost to the Deposit Insurance Fund of resolving SVB is $20 billion. The FDIC also estimates the cost of resolving Signature Bank to be $2.5 billion. Importantly, NO taxpayer money has been put at risk. Why did SVB and Signature Bank fail? It appears that the primary cause of these banks’ decline was an unusual combination of narrow customer base, explosive growth, and above average risk management failures. As stated in testimony by Federal Reserve Vice Chairman for Supervision, Michael Barr, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs: “SVB’s failure is a textbook case of mismanagement. The bank had a concentrated business model, serving the technology and venture capital sector. It also grew exceedingly quickly, tripling in asset size between 2019 and 2022. During the early phase of the pandemic, and with the tech sector booming, SVB saw significant deposit growth. The bank invested the proceeds of these deposits in longer-term securities, to boost yield and increase its profits. However, the bank did not effectively manage the interest rate risk of those securities or develop effective interest rate measurement tools, models, and metrics. At the same time, the bank failed to manage the risks of its liabilities. These liabilities were largely composed of deposits from venture capital firms and the tech sector, which were highly concentrated and could be volatile. Because these companies generally do not have operating revenue, they keep large balances in banks in the form of cash deposits, to make payroll and pay operating expenses. These depositors were connected by a network of venture capital firms and other ties, and when stress began, they essentially acted together to generate a bank run.”
The FDIC has completed the sale of both banks to acquiring institutions. New York Community Bancorp’s Flagstar Bank is acquiring Signature Bank and First-Citizen Bank and Trust Company is acquiring SVB.
What is the plan? As a banker, I am proud to say our banking system is sound and resilient with strong capital and liquidity. In the case of SVB and Signature Bank, the regulators and Treasury took actions to protect our economy and to strengthen public confidence in our industry. The U.S. banking system is the widest and deepest in the world. Our strength is in our numbers and in our diversity of bank size and business model. With nearly 4,700 banks, including more than 3,700 community banks under $1 billion in assets, the U.S. banking system remains strong, and employs more than 2 million professionals, safeguards $19.4 trillion in deposits, and extends $12 trillion in loans.
Let’s not throw the baby out with the bath water. Certainly the Executive and Legislative branches of government need to know what happened with SVB and Signature and why. But it is premature to call for legislative and regulative rule changes before all the facts are in. Allowing for a thoughtful and deliberate review of the facts will yield much better results.
