With two large banks having been taken over by the FDIC in the past few days, people might be wondering if we’re about to see a replay of the 2008 banking crisis which led to 465 banks closing between 2008 and 2012. Of course, the proper answer is ‘I don’t know’ but I will venture a guess of ‘I don’t think so’.
The situations are quite different. The 2008 failures resulted from lower underwriting standards being applied across the country which put numerous banks in the same boat. People with marginal credit scores took out loans, many to purchase multiple properties, expecting to make money renting them out and eventually selling them. When the real estate market cooled, thousands of those borrowers stopped making payments on their loans, leaving banks with insufficient cash to operate.
In this week’s case, the banks had grown so fast that they hadn’t had time to make loans, so had invested the deposited funds in bonds – generally bonds issued by the US government and its agencies. While all such bond investments are guaranteed when held to maturity, a bank (or individual) forced to sell bonds prior to maturity only receives the current market value. As interest rates rose over the past year (part of the Federal Reserve’s effort to reduce inflation), the value of specific bond investments fell.
Dare I return to the film It’s a Wonderful Life? If you remember it, you probably recall the bank run scene: the depositors all want their money NOW but those funds are tied up in loans to others in the community. In the case of Silicon Valley Bank, the value of the bonds had fallen and, just like what Jimmy Stewart’s character encountered, there wasn’t enough money to meet all of the withdrawal requests.
This was a tough weekend for bank shareholders, as the banks themselves are not being bailed-out. Only depositors are being made whole. According to Treasury Secretary Janet Yellen, the Treasury will back deposits regardless of how large.
Silicon Valley Bank is the second largest to ever fail and New York-based Signature Bank is the third. The question of how broadly the failure will spread led to a sell-off in regional bank shares on Monday. That said, this scenario does not seem to mirror the widespread ‘systemic’ risk of failure that characterized the 2008 crash. These banks primarily catered to huge depositors: those engaged in crypto currency investing and tech industries funded by venture capitalists. In fact, nearly 90% of SVB’s deposits were above the FDIC insurance limit. This includes the tech company Roku which had over $480 million on deposit with SVB – virtually all uninsured.
When rates seem appealing, WWA sometimes purchases CDs for our clients. When we buy CDs, we shop from among dozens of financial institutions. All are federally insured so that no client ever goes over the FDIC insurance limit.
Because most banks are involved in a much wider variety of types of business, the pain seems to be much more narrowly concentrated this time around. For example, the largest locally-owned institution, Centra, boasts a well-diversified balance sheet and maintains a strong liquidity position with a net worth ratio about 20% higher than the industry average. They, and I imagine all banks operating locally, are on firm financial footings.
As always, we are here to answer your questions and try to help you work through those difficult questions.