A year on, SVB’s killer is still at large

Customers Bancorp

07/03/2024 13:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By John Foley
       NEW YORK, March 7 (Reuters Breakingviews) - Death came
for Silicon Valley Bank the way it almost always does for doomed
banks: by depositors fearful of losing their money rushing for
the door. But that mortal moment, which unfolded a year ago this
week, was the culmination of a process that started long before.
The killer – a disjointed system that is supposed to oversee,
save or wind up U.S. banks but in practice struggles to do any
of the three – is still at large.
    With the benefit of hindsight, California-based SVB
Financial was a compendium of problems in the making. It had
grown extremely quickly by relying on a small number of
depositors, principally startups backed by venture capital
firms. Over 90% of those had balances exceeding the Federal
Deposit Insurance Corp’s guarantee, which protects customer
savings up to $250,000 if a lender goes under. SVB had parked
customers’ cash in long-dated government bonds that slid in
value when interest rates rapidly rose. The upshot: when
withdrawals mounted, it could not deliver, and closed its doors.
    The collapse triggered a period of high anxiety. Bank
shareholders and customers quickly twigged that in the age of
social media and online banking, runs can happen in minutes. SVB
lost a quarter of its deposits in 24 hours. Within days,
Signature Bank – another big lender with a technology-skewed
customer base – had failed too. In the following months First
Republic collapsed, and PacWest found a buyer after its shares
slumped by 60%.
    One lesson was that regulators taxed with keeping banks safe
had, in SVB and Signature’s case, dropped the ball. The Federal
Reserve and FDIC watched risks pile up at both institutions, yet
supervisors and their superiors had failed to put executives on
a safer course. Once the immediate crisis passed, both
regulators issued detailed yet essentially weak self-criticisms.
    Twelve months on, investors are still worried about banks.
The shares of four-fifths of the lenders which make up the FR
U.S. Banks Index are lower than in early March 2023. Notable
exceptions are JPMorgan  JPM.N , Customers Bancorp  CUBI.N , and
First Citizens Bancshares  FCNCA.O , all of which acquired parts
of lenders that failed. The focus of anxiety has moved, though,
from flighty depositors to wobbly real estate. New York
Community Bancorp  NYCB.N , which on Wednesday received a $1
billion equity injection from a consortium led by former
Treasury Secretary Steven Mnuchin, passed through the SVB
mini-crisis unscathed only to become a lightning rod for
investor concerns over bad property loans. Exposure to
commercial real estate has weighed on the share prices of
lenders like Bank OZK  OZK.O  and Valley National Bancorp
 VLY.O .
    What’s troubling is that even as banks weather new
challenges in their loan books, many of the earlier flaws in the
bank ecosystem remain. Bank oversight, for example, is still
patchy. The U.S. has multiple regulators that share the job of
watching lenders, depending on the institution’s type, location,
and history. There are strengths in division. But if the
agencies do not work together, or are not of equal quality, the
system is weaker. NYCB’s problems only surfaced after oversight
passed from New York’s state regulator to the federal Office of
the Comptroller of the Currency.
    After the bank failures of March 2023, the Fed and FDIC both
acknowledged their staff had not been forceful or quick enough.
Fed supervisory chief Michael Barr says examiners are now faster
and more assertive. Even so no high-level heads have rolled.
Moreover, the problem of overly shy regulators goes way back.
Supervisors of Continental Illinois, which failed in 1984 after
years of breakneck growth, later admitted that they had been too
sheepish to push for necessary changes. 
    The mechanism for saving banks that get into trouble is also
still glitchy. The main tool is the Fed’s discount window, which
offers banks cash in return for them temporarily pledging assets
like commercial loans and mortgages. Most financial firms do not
want to use this facility as it might signal distress. Worse,
banks including SVB and Signature weren’t ready when they needed
it.
    There’s hope on that front. The Fed now encourages – though
still does not compel – banks to get ready to tap at the window.
But the stigma remains, as it has for nearly a century, the New
York Fed noted in a recent study. After SVB failed, the Fed set
up an alternative lending facility that let banks borrow against
Treasury bonds on lavishly generous terms. That program expires
on March 11, but if banks again hit the rocks, the central bank
would have to fire it up again.
    And if a bank does hit the wall, there’s still ambiguity
about who gets protection. Around 40% of all bank deposits are
above the FDIC insurance limit, but regulators have sent a
signal that they will protect wealthy customers regardless. When
SVB and Signature failed, the FDIC invoked a special crisis
clause that lets it rescue every depositor to avoid a wave of
bank runs. It is hard to see how regulators could avoid doing
the same if another large bank begins to unspool.
    The FDIC proposed some alternatives, including raising the
limit on insurance for corporate bank accounts used to pay
employees and suppliers. That is what happens in Japan and used
to be the case in the United States. The change would require
Congress to act, however, and lawmakers show little appetite for
such things. Banks have meanwhile set up reciprocal agreements
that carve up depositors’ balances and parcel them out in small
chunks. That is how NYCB can say that its $23 billion of
uninsured deposits could almost all, in a pinch, be insured.
    Lightning ought not to strike twice. Investors, supervisors,
and analysts are now undoubtedly more alert to risks like
uninsured deposits, customer concentration and interest-rate
vulnerabilities. So long as all depositors enjoy de facto
protection, there is no reason for bank runs to happen at all.
Even an 80% fall in NYCB’s share price in little more than a
month didn’t send customers running. But that does not
neutralize the weaknesses in supervision, rescue and resolution
that linger a year after SVB’s grisly demise. When the next bank
inevitably fails, the culprits will be all too familiar.
    Follow @johnsfoley on X
    
    CONTEXT NEWS
    U.S. regulators seized Silicon Valley Bank on March 10,
2023, after depositors withdrew $42 billion in a single day. Two
days earlier, the bank had sold a $21 billion bond portfolio at
a loss to meet customer redemptions. It was the first U.S. bank
failure in two years.
    Signature Bank was closed and placed into receivership on
March 12. The New York-based lender was a major provider of
banking services to cryptocurrency firms. In both failures, all
depositors were repaid, regardless of whether their balances
were officially insured or not.
    First Republic failed on May 1, despite a $30 billion rescue
package of deposit funding provided by large lenders including
Citigroup and JPMorgan. The bulk of its assets were acquired out
of receivership by JPMorgan.


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Graphic: US bank investors still see a glass half empty    https://reut.rs/3V5uzHV
Graphic: Banks are still highly reliant on uninsured deposits   
https://reut.rs/3Ip1v6p
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 (Editing by Peter Thal Larsen and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  FOLEY/ 
john.foley@thomsonreuters.com; Reuters Messaging:
john.foley.thomsonreuters.com@reuters.net))