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SVB's lightning collapse stuns banking industry

Published Mar 11, 2023 07:52AM ET Updated Mar 11, 2023 11:57AM ET
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© Reuters. FILE PHOTO: A sign for Silicon Valley Bank (SVB) headquarters is seen in Santa Clara, California, U.S. March 10, 2023. REUTERS/Nathan Frandino/File Photo

By Pete Schroeder and Nupur Anand

WASHINGTON/NEW YORK (Reuters) - The rapid unraveling of SVB Financial Group has blindsided the banking industry after years of stability.

The collapse on Friday, the largest bank failure since the 2008 financial crisis, had a unique set of circumstances but raised questions about hidden weaknesses that could have consequences for customers and employees and potentially highlight issues in other banks.

SVB's plight could lead to a loss of confidence, tougher regulation and investor skepticism about the financial health of smaller banks that were seen as adequately capitalized after regulators forced banks to hold more capital in the aftermath of the 2008 crisis, experts said.

Sheila Bair, who headed the Federal Deposit Insurance Corp (FDIC) during the global financial crisis, said in an interview that bank watchdogs are likely now turning their attention to other banks that may have high amounts of uninsured deposits and unrealized losses, two factors that contributed to SVB's quick collapse.

“These banks that have large amounts of institutional uninsured money...that’s going to be hot money that runs if there’s a sign of trouble,” Bair said.

A sequence of events led to SVB's failure including it selling U.S. Treasuries to lock in funding costs due to expectations of higher rates, resulting in a loss of $1.8 billion. SVB, which did business as Silicon Valley Bank, also had 89% of its $175 billion in deposits uninsured as the end of 2022. The FDIC insures deposits up to $250,000. 

Investors and customers now face a nervous wait to see if SVB bank finds a buyer quickly. During the 2008 financial crisis, Washington Mutual found a buyer immediately. But for IndyMac, in 2009, it took about eight months.

The speed of the SVB crash blindsided observers and stunned markets, wiping out more than $100 billion in market value for U.S. banks in two days.

"Banks are opaque, so immediately, we all go 'wait a minute, how interconnected is this bank to another one,'" said Mayra Rodríguez Valladares, a financial risk consultant who trains bankers and regulators. "Investors and depositors do not want to be the last ones turning out the lights in the room, so they have to leave."

TOUGHER RULES

Several experts said any ripple effects in the rest of the banking sector may be limited. Larger institutions have more diverse portfolios and deposit clientele than SVB did. SVB also had a high level of reliance on the startup sector. 

"We do not believe there is contagion risk for the rest of the banking sector," said David Trainer, CEO of New Constructs an investment research firm. "The deposit base from the major banks is much more diversified than SVB and the big banks are in good financial health."

Jason Ware, chief investment officer for Albion Financial Group, said linkages to the overall banking system are limited but "this situation has perhaps implications for select regional banks with some direct exposure."

Other experts said the failure could bolster efforts by U.S. regulators to tighten rules.

The banking sector steered through the COVID-19 pandemic, thanks in part to tougher rules put in place following 2008. However, during President Donald Trump’s administration, some rules were eased.

Those easier rules for regional banks are likely to come under greater scrutiny as watchdogs look to ensure they too have enough cushion to weather similar stresses, some regulatory and industry sources said. 

Senator Elizabeth Warren, a prominent bank critic, tweeted that the bank's failure "underscores the need for strong rules to protect the financial system."

One area of particular focus could be larger regional banks, which saw some rule relief under the Trump administration. U.S. banking regulators said in October they were considering new requirements on large regional banks, including holding more long-term debt to weather losses.

"It does feel like the first place that the market is going to look is to regional banks that don't have loan diversification," said Greg Hertrich, head of U.S. depository strategies at Nomura.

Another requirement that could garner more attention, industry sources said, was expanding which banks are required to account for the market value of held securities. That requirement currently only applies to banks with over $250 billion in assets, but could grow to include other firms.

On Monday, FDIC Chairman Martin Gruenberg warned bankers gathered in Washington that firms are facing higher levels of unrealized losses, as rapid interest rate increases have driven down the value of longer-term securities.

“The good news about this issue is that banks are generally in a strong financial condition... On the other hand, unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs,” said Gruenberg, three days before SVB announced its need to raise funds. (This story has been corrected to change the year of financial crisis to 2008 in paragraph 2)

SVB's lightning collapse stuns banking industry
 

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Comments (9)
Mark Taylor
Mark Taylor Mar 12, 2023 2:48PM ET
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Reuters. Get the truth out. SVB was a high risk venture funded with hot money. When the three venture capital firms became worried, they advised their managers to move funds out. That's it! This is not a systemic issue to cause in any shape or form contagion. This is media hype and needs to stop immediately!!
Mar 11, 2023 12:51PM ET
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lightning collapse? the media is so corrupt.
G D
G D Mar 11, 2023 11:32AM ET
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If you're stunned, you shouldn't be doing this type of job. Funny how these people NEVER see anything coming because in their minds they're geniuses who can never be wrong and that it's something else at fault.
Warm Camp
Warm Camp Mar 11, 2023 9:55AM ET
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Onerous US banking “regulations” are well beyond the point of direct mandating what banks can and cannot do. This has made the banks part of the same totalitarian socialist government and, of course, they show all signs of financial mismanagement and recklessness common for socialism. In SVB case the government mandated that the bank must buy and hold low-yield bonds, aka government debt, losing nominal value daily. What kind of results can be achieved by these socialist policies of debt economy? A bankruptcy, pure and simple.
Brad Albright
Brad Albright Mar 11, 2023 9:55AM ET
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That's hilarious.
Anton Wangsa
Anton Wangsa Mar 11, 2023 9:32AM ET
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it just collateral damage for the fed war for inflation
Mar 11, 2023 9:16AM ET
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Here comes more QE and zero interest rates. Inflation about to skyrocket
oeg vokar
oeg vokar Mar 11, 2023 9:03AM ET
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This bankruptcy is under Biden' watch and again Trump is to blame even though he has not overseen anything for 2 years. Typical liberal excuses, someone else is to blame. And what is the responsibility of the current administration or they are there for the good life, SV's and selfies
Michael Galassini
RoyHobbs Mar 11, 2023 8:21AM ET
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There is clearly more fire here from SVB, this thing collapsed way too quick for there not to be some ill-conceived bets or lending due diligence.
Angus Malarkey
Angus Malarkey Mar 11, 2023 8:01AM ET
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Elizabeth Warren doesn't understand Capitalism.
 
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