Written By: Gurkomal Gill
While the market was fixated on the interest rate hikes, March 2023 began with a string of 4 back-to-back bank failures in the United States. After Washington Mutual’s fall in 2008, First Republic Bank, Silicon Valley Bank and Signature Bank collapses were the second, third and fourth largest banking collapses in US, respectively (1). Bank runs and liquidity troubles were the start of woes for these banks. The panic among investors and swift withdrawals exposed the underlying liquidity crisis. This article dives into the developments unique to each bank and explores the commonalities that led to the crises.
The following outlines various banks and the causes that led to their crises.
Silvergate and Signature Bank’s Crypto Woes: For Silvergate Bank and Signature Bank, cryptocurrency losses were the primary reason for their collapse (2). Silvergate had regulatory approval for lending to crypto firms since 2014 and Signature had started soliciting crypto firms in 2018, but both saw a surge in their assets during the COVID-19 pandemic when the digital currency market was booming (2) (4). At Silvergate, 90% of the bank’s deposits were crypto based, including a billion dollars by FTX while Signature Bank’s deposits from crypto firms quadrupled from 2018 to 2022 (3) (4). However, a trillion-dollar wipeout in the cryptocurrency market and failure of FTX in 2022 caused bank runs at these institutions (3). The banks faced uncertainty as they had billions of dollars in withdrawal requests which ultimately plunged them into liquidation (3) (4).
Tech Concentration of Silicon Valley Bank (SVB): As the name goes, SVB’s services were heavily concentrated in serving tech companies (5). The bank was financing nearly half of US venture backed life science and technology companies (5). The assets on bank’s balance sheet, which comprised of loans to tech firms, tripled with a span of a little over 2 years from late 2019 to March 2022 (5). Their deposits also followed suit (5). SVB used the deposits to purchase US government bonds which saw a massive decline in their prices as the Fed aggressively raised interest rates in 2022 (5). The tech firms, that were having a tough time securing venture financing along with expensive debt payments, resorted to cash out their deposits (5). This ultimately forced the bank to sell the treasury bonds and realize the losses due to decline in their market value (5). These events pushed the bank into a situation of liquidity crunch and huge financial losses.
Uninsured Deposits’ Issues for First Republic Bank: Following the collapse of the other 3 banks, First Republic Bank was faced with similar liquidity woes as SVB (6). The bank which started off as a wealth management provider in the 1980s was now catering to tech companies on the west coast (6). The tech focus along with a loan-to-deposit ratio of 111%, which meant extensive uninsured deposits, led to credit rating downgrades for First Republic in early 2023 (6). This led to low investor confidence which ultimately turned into a bank run that forced the institution into a liquidity crisis (6).
Could it be detected early? Hint: Accounting Regulations: While macroeconomic factors like inflation and interest rates are the main reasons behind the collapses, the fair value reporting is touted to be a factor as well. Many experts argue that the accounting standards may not have directly caused the crisis, but it certainly could have made detection difficult. Currently, the FASB in the US permits the banks to exclude any unrealized losses on Held-to-Maturity securities if they do not plan to sell those instruments (8). Avoiding the reporting of the unrealized losses led to inflated balance sheets that were reporting securities way above their realizable value (8). As a result, when the securities were eventually sold off to cover for the liquidity demand, they did not bring in the cash expected by their balance sheet value (8). This theory has led to growing clamour for the FASB to investigate the accounting regulations in order to ensure more transparent reporting.
What Happens Next?
While the banks have been under FDIC receivership, it would be interesting to watch out for any new financial and regulatory developments that may emerge after the current banking collapse.
Works Cited
“JP Morgan Boss Plays down Risk of Banking Crisis Worsening after First Republic.” The Guardian, May 1, 2023. https://www.theguardian.com/business/2023/may/01/us-banking-titan-jp-morgan-to-snap-up-most-of-first-republic?0=utm_source&1=utm_medium.
Morrow, Allison. “Crypto-Friendly Lender Silvergate Collapses | CNN Business.” CNN, March 9, 2023. https://www.cnn.com/2023/03/08/business/silvergate-winds-down-crypto/index.html.
Person, and Anirban Chakroborti Hannah Lang. “Crypto-Focused Bank Silvergate Plans to Wind down Following Blow from FTX.” Reuters, March 9, 2023. https://www.reuters.com/technology/crypto-focused-bank-silvergate-plans-wind-down-operations-2023-03-08/.
Person. “Signature Bank Failure Due to ‘poor Management,’ US FDIC Report Says.” Reuters, April 28, 2023. https://www.reuters.com/markets/us/signature-bank-failure-due-poor-management-us-fdic-report-says-2023-04-28/.
Ziady, Hanna. “Why Silicon Valley Bank Collapsed and What It Could Mean | CNN Business.” CNN, March 13, 2023. https://www.cnn.com/2023/03/13/investing/silicon-valley-bank-collapse-explained/index.html.
Saul, Derek. “First Republic Bank Failure: A Timeline of What Led to the Second-Largest Bank Collapse in U.S. History.” Forbes, May 2, 2023. https://www.forbes.com/sites/dereksaul/2023/05/01/first-republic-bank-failure-a-timeline-of-what-led-to-the-second-largest-bank-collapse-in-us-history/.
“Bank Collapse Prompts Another Look at Fair-Value Accounting for Securities.” NYSSCPA. Accessed June 21, 2023. https://www.nysscpa.org/news/publications/the-trusted-professional/article/bank-collapse-prompts-another-look-at-fair-value-accounting-for-securities-032123.