Last week’s events came at a breakneck speed, and with the echo chamber of social media, it can be hard to discern facts from conjecture. In the last 8 days, 3 banks have stopped functioning in one way or another. Although all the causes are not known, an SEC and FDIC audit of the SVB breakdown is forthcoming – the results of this audit will provide more information on a path forward.
Here we examine some known factors that contributed to the problems each bank faced.
What Exactly Happened?
Liquidity issues due to significant deposit outflows were the ultimate downfall of each bank. One thing to note is that these 3 banks all had significant uninsured deposits due to the industries and customers they banked. To put this in perspective, the number of uninsured deposits held by each of the 3 banks exceeded 80% on December 31, 2022 (September 30, 2022 for Silvergate), while a review of public filings for 7 banks with assets under $50B headquartered in the northeast showed uninsured deposits ranging from 31% of total deposits to 51%. For further perspective, other large banks such as JP Morgan, Fifth Third Bank, Wells Fargo, Citizens, Goldman Sachs, and Bank of America all had less than 53% uninsured deposits on December 31, 2022.
Below we offer an overview of what occurred at each bank:
- Silvergate was primarily a crypto bank, acting as a big industry lender and facilitating transfers between exchanges and market makers.
- Due to marketplace uncertainty stemming from the FTX collapse and the current state of the cryptocurrency industry, the bank saw a significant decline in deposits in the 4th quarter of 2022.
- On Wednesday, 3/8, the bank decided the best course of action was to liquidate the bank – the intention is for all deposits to be fully repaid.
- SVB was largely based on supporting the tech industry, early-stage companies, and venture capitalism.
- As a result of its customer base, SVB dealt with large amounts of uninsured cash.
- The recent market climate in the tech industry led to fewer deposit inflows and more deposit outflows, which created the initial liquidity issues for the bank.
- Due to fears of insolvency, customers began withdrawing their deposits, causing a run on the bank, and the bank was taken over by the FDIC on Friday 3/10.
- Signature also banked many customers with large uninsured deposits, with some being in the crypto space and others in professional services.
- As a result of the SVB collapse, we must believe that uninsured depositors were uneasy and began withdrawing their funds, causing a run on the bank. The NY banking regulators took over the bank on Sunday 3/12.
What Comes Next?
This has been a tumultuous week, and the recent events will certainly have ripple effects on the industry as a whole. Some of our questions are as follows:
- We will likely see a hike in insurance assessments for banks, but by how much?
- Will there be changes to come in terms of future regulation? We think so, but it remains unclear what that might look like.
- Will there be changes in how investments are accounted for?
- Where will the deposits from these banks end up? Will we see a migration in the banking industry to larger banks that are considered “too big to fail,” or will community banks find a way to court these deposits?
Things to Think About
Although the events that impacted these three banks are extraordinary, many financial institutions can relate to at least one or more of the above items.
As this is a developing story, and as more details are revealed and analysis is performed over the causes and effects, additional noteworthy details will come to light. At a minimum we recommend considering the following for all institutions:
- Revisit and challenge the assumptions in your asset/liability models
- Your organization’s approach to client, customer, and investor outreach and marketing in the age of social media, including the mix of information to be communicated to key stakeholders
- Expanding related-party monitoring to include invested parties
Wolf will continue to cover this story as it develops. If you have questions or concerns about the evolving financial institution landscape, reach out to our team.