Everything Everywhere All at Once
The Bank Panic of 2023
It’s been a remarkable few weeks.
California banking regulators took control of Silicon Valley Bank (SIVB) and appointed the Federal Deposit Insurance Corporation (FDIC) as receivers, citing inadequate liquidity and insolvency. This was the second-largest bank failure in US history.
The bank announced on March 8 that it had sold $21B of its available-for-sale (AFS) securities from its portfolio at a $1.8B loss and would sell $2.25B in new shares to shore up its balance sheet because of losses on its hold-to-maturity (HTM) bond portfolio due to the rapid increase in interest rates by the Federal Reserve.
The news unnerved its concentrated client base, and several high-profile venture capitalists instructed their portfolio companies to move funds to another bank. Within hours, $42B, over 25 percent of their deposit base, left the bank. This is what a bank run looks like in the digital age.
The next day investors aggressively sold shares of Silicon Valley Bank (SIVB), which subsequently fell 62 percent, rendering them unable to move forward with the equity offering. Unable to raise capital or find a buyer, regulators took over on Friday, March 10.
Following the closure of crypto-centric Silvergate Bank (SI) the week before, already nervous crypto-adjacent Signature Bank of New York (SBNY) depositors withdrew over $10B - 20 percent of its deposit base in only a few hours - on news of the collapse of Silicon Valley Bank. The rapid outflow of deposits prompted the New York State Department of Financial Services to shut down Signature Bank on Sunday, March 12, and place the bank into FDIC receivership.
Sunday evening, before markets opened on Monday, a joint statement was released by Secretary of Treasury Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin Gruenberg:
After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.
We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.
Despite this assurance, the spillover from US history’s second and third-largest bank failures reverberated across regional banks, particularly those in the western region of the United States. Large uninsured depositors pulled assets from First Republic Bank (FRC), Pacific Western Bancorp (PACW), and Western Alliance Bancorporation (WAL).
As this was happening, equity investors aggressively sold these regional banks’ shares, further spooking depositors and shareholders alike.
First Republic Bank (FRC) shares fell 73 percent.
Pacific Western Bancorp (PACW) shares fell 61 percent
Western Alliance Bancorporation (WAL) fell 62 percent
As the US financial system was reeling from the collapse of two major banks, Swiss regulators were facing their own crisis with Credit Suisse. The bank was losing money, facing multiple scandals, and experiencing a mass exodus of depositors. In a desperate attempt to save the bank, Swiss regulators forced a merger with UBS.
Credit Suisse’s troubles accelerated in 2021 when the bank lost over $5.5 billion in the blowup of hedge fund Archegos Capital. The bank then lost money for five consecutive quarters, and even its vaunted investment banking division was unable to turn a profit. Plagued by scandal after scandal, the once prominent Swiss bank found itself paying over 7 percent of the bank’s revenues in fines.
Credit Suisse’s financial troubles led depositors to pull over 40 percent of its deposits since 2021 and $140 billion from the bank in the fourth quarter of 2022 alone. At this point, Swiss regulators realized enough was enough and forced a takeover by UBS.
So naturally, everyone is asking, is this another banking crisis a la 2008? The short answer is no. Banks are much better capitalized today than in 2008, and they hold mainly US Treasury and Agency bonds, which have a very low risk of default. This starkly contrasts the subprime mortgages that banks held in 2008, which were a significant cause of the financial crisis.
The issue plaguing banks today is not the quality of assets on their books; rather, the value of those bonds has declined due to rate hikes over the past year. As the value of the bonds fell, the bank’s capital ratio - a measure of financial strength - also declined.
The pressure on capital ratios has only worsened as depositors move cash from regular passbook checking and savings accounts into money market accounts that yield over 4 percent.
To ease pressures in the banking system, the Federal Reserve announced the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, government agency debt, and mortgage-backed securities as collateral. These assets will be valued at par – 100 cents on the dollar – which can be used as additional sources of liquidity.
Although challenging, the situation is not a crisis, and some banks will need to adjust by raising capital, cutting costs, and reducing lending. The banking system remains stable, and there is no indication of an imminent collapse.