The closure of Silicon Valley Bank (SVB) in March sparked an enduring challenge on the markets and economic solvency of banks across the world. We all watched this story unfold and held our breath for another Black Tuesday. We’re a few months past this bank failure without a total meltdown, but we’ve watched how it has affected the economy, and we continue to feel the reverberations.
What really happened to SVB? Previously the 16th-largest bank in the United States, what went wrong? When pressed to provide more liquidity of cash, SVB had to sell holdings of long-term securities, a curious move to those in the know, because at the time, the value of these had dipped due to rising interest rates from the Fed. It is expected that the value of these securities will increase in time (hence the “long-term”), so to sell so much of something at such a loss… people were suspicious about the safety of their investments and began quickly moving their money en masse – so much so that it was essentially a run on the bank, fueled by Twitter, perhaps influenced by McKinsey consulting, provoked by a bad decision made by SVB, that turned a previously solvent bank on end, and it failed.
After this collapse, federal regulators promised to make all depositors whole, even for those funds that weren’t protected by the Federal Deposit Insurance Corporation (FDIC). The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category, but in a big move to stop a massive potential trend of runs on banks, regulators ensured that all depositors would have access to their funds regardless of SVB’s status as a bank. In a deal struck by the FDIC, First Citizens Bank bought SVB’s deposits and loans, in addition to certain other assets.
Of course we all remember 2008, when the government bailed out banks, costing each of our 308 million citizens at the time about $1,612 each, for a total of $498 billion, which amounted to 3.5 percent of gross domestic product in 2009. This time around, with SVB, the money for depositors will come from a fund that banks pay into, the Deposit Insurance Fund, and not from taxpayers. However, this fund is now well depleted due to the $20 billion dollar payouts to SVB and Signature Bank, and another $13 billion to First Republic Bank, the other big banks that failed soon after SVB for similar reasons.
A particularly interesting take on all this comes from The Daily, an excellent podcast put out by the New York Times that does deep dives on topical issues. In one episode, The Daily interviewed former U.S. Sen. Barney Frank, who was partially responsible for Dodd-Frank, the most sweeping consumer protections against Wall Street misbehavior. Enacted in 2010, after much legislative work following the ’08 banking crisis, it has since been loosened and partially repealed via the Economic Growth, Regulatory Relief and Consumer Protection Act, effective in 2018 – with Barney Frank, now in the private sector, advocating for the weakened rules. This change put the onus of capital requirements on the biggest of banks, the ones that are “too big to fail.” And yet, as we saw with SVB and others, it seems as though any banks failing requires government involvement at any size, so perhaps this law will change… something to keep an eye out for.
We’re not totally out of the woods. Banks are still stumbling, though mostly smaller ones recently. And, while there has been chatter that these smaller, regional banks across the country might have issues, most experts say widespread failure won’t be happening. In fact, recently the top regional banking indexes, the KBW Regional Banking Index, was up 5.2% in early June and continuing to grow, an exciting rally for those insisting that everything will be OK in the end.
A typical economist’s point of view was bolstered by the fact that the FDIC made all depositors whole regardless of the $250,000 threshold, but that doesn’t give carte blanche for other banks to continue with bad behavior knowing they’ll be essentially bailed out.
“The banks are OK, because the Fed has brought in a bazooka to stave off any further fears that institutions aren’t on strong footing,” Nathan Stovall, head of financial institutions research at S&P Global Market Intelligence, told CNBC in March. “And most [banks] are saying they have no need for it.”
There are many issues to keep in mind, and a number of alarmist articles out there to keep you guessing, but overall, we’ve weathered the storm. It looks as though the challenges SVB, Signature, and First National Bank faced were unique to their clientele and that particular moment in time.
That said, growth is slowing. A recent report from the World Bank noted that advanced economies — the United States, Japan and several European countries — are expected to grow by only 0.7% in 2023, down from 2.6% in 2022. Inflation is hurting everyone, and the financial world is not sitting comfortably.
We’ll know more at the end of the month when the Federal Reserve and U.S. regulators unveil proposed tougher requirements, which may require capital hikes of as much as 20%, in order to prevent any potential bank insolvency in the future. How will this impact the economy? Only time will tell.