Commentary on Bank Closures

Chris Drouin |

March 13, 2023

BWM Commentary on Bank Closures

Sunday evening Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and Federal Deposit Insurance Corporation (FDIC) Chairman Martin J. Gruenberg announced that Secretary Yellen, in consultation with the President, as required, authorized the FDIC to fully protect everyone who had money in Silicon Valley Bank, Santa Clara, California, and Signature Bank, New York. This morning all depositors had access to all of their money this morning. No cost “will be borne by the taxpayer.” Fees will be assessed via the FDIC insurance program to cover any FDIC outlay.

Is this the beginning of the end or a normal occurrence? This is the first bank failure of the Biden Administration. There were sixteen during the Trump Administration, eight of which happened before the pandemic. In fact, generally, a few banks fail every year; it is a statistical oddity that no banks failed in 2021 or 2022.
Let’s look at the details of each bank with issues:

First we have Silicon Valley Bank (SVB)
1. Friday brought to light the issues of Silicon Valley Bank (SVB). While it sounds large as the 16th largest bank with $209 billion in total assets, it is dwarfed by the banks above it which hold many trillions each.

2. SVB received the reduction in government regulation it lobbied then President Trump for and brought this on themselves. In my opinion, this is a story of why prudent regulation of banking is important if there are also government supports in place through the FDIC program and other “lender of last resort” actions available through the Federal Government. SVP was allowed to hold bank funds in less conservative investments, which they would not have been allowed to do under previous regulations. The regulations were tightened up post 2008 and now we are seeing the effect of the loosening on SVP’s mistakes.

3. What led to SVP’s failure? Is this a system wide problem or just something internal to SBVP? I feel this is an issue for SVP or any other bank that is acting imprudently. They took advantage of deregulation to create their own noose. Long term government bonds are not appropriate for short term needs. SVP held too many long-term government bonds thinking that the Fed would not raise interest rates. The Fed did raise interest rates, as they said they would do all along and when SVP sold some of the bonds, they were not able to get full price. Word spread among their primary customers, who were tech companies, and we had a classic bank run. Thankfully this happened on a Friday and the government had the weekend to act quicky.
Long term government bonds paying a reasonable interest rate are a prudent part of an individual’s portfolio needing steady income. Long term bonds are not a prudent investment in a large amount for banks whose duty is to provide depositors their money back nearly instantly. As we have all seen, long term bonds can fluctuate in value.
SVC’s main error is that the bank risked their long term business model and violated their duty to their depositors by placing profit above safety.

4. Is this a problem for all banks? For most banks, higher interest rates are good news because they can charge more for loans. But for SVB, higher interest rates decreased the value of the bonds they held and they had to sell them at a loss to cover withdrawals. Other depositors panicked as they saw SVB selling investments at a loss and losing deposits, and they, too, started pulling their money out of the bank.
Second we have Signature Bank and Silvergate Bank, both of which were seized by regulators. Both were crypto currency centric bank. Crypto currency is not a regulated asset. I see no need to comment further.

What is the FDIC?
Congress created the FDIC under the Banking Act of 1933 to restore trust in the American banking system after more than a third of U.S. banks failed after the Great Crash of 1929, sparking runs on banks as depositors rushed to take out their money whenever rumors suggested a bank was in trouble, thus causing more failures. The FDIC is an independent agency that insures deposits, examines, and supervises banks to make sure they’re healthy, and manages the fallout when they’re not. The FDIC is backed by the full faith and credit of the government, but it is not funded by the government. Member banks pay insurance dues to cover bank failures, and when that isn’t enough money, the FDIC can borrow from the federal government or issue debt.
I see the irony that the tech industry has been clamoring for the FDIC and government to back stop all deposits at SVB, even those without legal protection over the $250,000 coverage limit, while also complaining of government regulation. Had the post 2008 banking regulations remained in effect, SVP would not have legally held such misaligned assets for their mission and duty to depositors and I might not have had any need to write this email.