March 13, 2023
Regional Bank Failures
Federal Reserve & Treasury Department backstop deposits after three regional banks fail over the past week.
Last week, three banks catering to the crypto and venture capital industries failed.
- March 8th, Silvergate Capital Corp (ticker SI), a bank that at one point had $14bn in deposits, commenced a voluntary liquidation,
- March 10th, Silicon Valley Bank (ticker SIVB), the 10th largest bank in terms of assets, holding $175bn in deposits, went into FDIC receivership,
- March 12th, Signature Bank (ticker SBNY), with $83bn in deposits, went into FDIC receivership.
What caused these bank failures?
Each bank experienced rapid deposit growth during 2020-2021, a period of very low interest rates, as the cryptocurrency and venture capital industries boomed. During this period, these banks invested customer deposits in bonds and mortgage-backed securities with relatively low interest rates and relatively long maturities. Each bank has a narrow deposit base, focused primarily on industry-specific corporate customers, and with the majority of deposits above the $250,000 FDIC insurance limit. These depositors have been challenged in 2022, with trouble in the cryptocurrency industry and a slowing venture capital funding cycle. The growth in deposits reversed rapidly. Each entity struggled to remain solvent despite efforts to liquidate marketable securities. Silvergate Capital responded by commencing voluntary liquidation, Silicon Valley Bank attempted, and failed, to raise equity capital, and regulators closed Signature Bank on Sunday.
How have regulators responded?
On Sunday, March 12th, the Federal Reserve, Treasury Department, and FDIC announced that all depositors, including uninsured depositors, of Silicon Valley Bank and Signature Bank would have access to all of their money beginning Monday, March 13th.
In addition, the Federal Reserve and the Treasury Department announced plans to use emergency measures to ensure US banks are able to meet potential withdrawal demands from depositors. The Fed will ease terms of banks’ access to the discount window, allowing them to turn assets that have temporarily declined in value into cash without experiencing the types of losses that led to SVB’s demise. The Fed and the Treasury also approved a program to backstop deposits using the Fed’s emergency lending authority.
Depositors, it seems, will be made whole. Equity shareholders & debt holders of these companies, however, will be largely wiped out.
Are there risks for additional bank failures?
While we are attuned to the risk that other regional banks could face similar issues, we also note that each of these banks’ deposit bases were not particularly diversified, which may have positioned the banks for catastrophe under the right circumstances. While similarly positioned banks might be similarly at risk, we think contagion throughout the banking system (a la 2008), via the largest U.S. banks is unlikely. In particular with some help from Federal Regulators.
The Fed and the Treasury appear to have taken steps to insure against broadening of these issues and also moved to protect depositors. While the narrative will continue to unfold, it appears that, at least for now, an immediate crisis has been avoided.
What are the remaining open questions?
We believe there will be a market impact from these developments and we are contemplating the following open questions:
- Will these bank failures slow future Federal Reserve rate hikes?
- The bond market has marked down expectations for the Federal Funds rate significantly over the past several days.
- Will credit availability be impacted?
- Commercial loan officers have already been tightening lending standards. Will credit conditions tighten further?
- Will other banks take steps to preserve liquidity?
- While we do not anticipate additional failures, banks could reduce dividends, slow share repurchase plans, or take other actions that reduce payments to shareholders in favor of preserving liquidity.
- What are the implications internationally?
- All three failed banks were based in the US, but the rapid transition from low to higher interest rates is happening globally. Could international banks face similar challenges?
How are Greenleaf clients’ cash balances invested?
For most clients, Greenleaf utilizes an open-ended money market mutual fund for cash balances. This fund is not a deposit of any bank. This fund operates as a “government money market fund” and invests primarily in Treasury Obligations and repurchase agreements collateralized solely by Treasury Obligations.
We will continue to monitor developments and communicate our views. In the meantime, please contact any member of our team if you have questions.