Policymakers — especially President Biden — hoped Monday to dispel fears about the banking system after two high-profile bank failures, but several major questions remained unanswered four days into the crisis.
For starters, who are the potential buyers of either Silicon Valley Bank or Signature Bank after their collapses, and what remains to be acquired? Are other banks at risk of a collapse? Will the emergency measures put into place by the federal government prevent more bank runs, and what are the long-term ramifications of those measures, including the decision by the Federal Deposit Insurance Corp. to guarantee uninsured deposits at the two failed banks?
It’s hard to predict what happens next, but there is likely to be fallout, including the possibility that banks’ margins will get squeezed as they pony up and pay higher rates on deposits to preserve liquidity, said Kevin Crowley, a former investment banker who now teaches finance at Emory University in Atlanta.
“Even if people don’t pull money rapidly out of banks, banks are now under pressure to either provide higher interest rates on those deposits or risk losing them,” Crowley said Monday.
Some details about what happens next were clearer Monday, one day after Signature in New York was seized by its state-chartering authority and three days after regulators shut down Silicon Valley Bank in Santa Clara, California. In a press release, the FDIC announced that it had created a bridge bank that will be operated by the FDIC to protect Silicon Valley Bank depositors, and it appointed ex-Fannie Mae CEO Tim Mayopoulos to lead the entity.
In a separate press release about Signature Bank, the FDIC said it also transferred all “qualified financial contracts” of the failed bank to the bridge bank that has been set up for Signature. The FDIC defines such contracts as “any securities contract, commodity contract, forward contract, purchase agreement, swap agreement and any similar agreement that the [FDIC] determines by regulation, resolution or order to be a qualified financial contract.”
As for who might acquire Silicon Valley Bank or Signature, some analysts suggested that large banks could be likely candidates, though it is unclear how the largest banks would make a deal given federal rules that prohibit banks from holding more than 10% of the nation’s deposits.
Other industry watchers have crossed off the big banks. Cliff Rossi, a professor at the University of Maryland School of Business, said he doesn’t anticipate banks such as Citigroup or U.S. Bancorp “coming out of the woodwork” and doing a deal.
“There has to be some strategic value for taking on the assets of these companies,” Rossi said in an interview. “I don’t see a ready buyer that’s waiting in the wings.”
One major player that apparently isn’t interested in Silicon Valley Bank: PNC Financial Services Group, the nation’s sixth-largest bank by assets. A spokesperson confirmed Monday evening that the Pittsburgh-based company is not in talks to acquire Silicon Valley Bank or its holding company, SVB Financial Group.
“There’s not one clear buyer, obviously,” David Smith, an analyst at Autonomous Research, said in an interview Monday. “I’m sure there will be interested parties. It’s just a question of regulators finding someone they think is a good fit and someone that offers a good deal.”
As a result of the upheaval in the market, some bank stocks took another tumble Monday, signaling ongoing unease despite regulators’ attempts to calm worries and President Biden’s attempt in a live address Monday morning to assure the public that the nation’s “banking system is safe.” The KBW Nasdaq Bank Index, which serves as an industry benchmark, was down 11.66% compared to Friday’s close, while trading in several bank stocks — First Republic Bank, Western Alliance Bancorp, PacWest Bancorp, KeyCorp and East West Bancorp — was halted periodically throughout the day amid the volatility.
Considering some of the stock slides, the dual message from the regulators and Biden appears not to have won over large corporate depositors, according to Stephens analyst Terry McEvoy.
“The announcement [Sunday] may not stop large companies from diversifying their deposits to other banks because who knows where we’re headed next and whether the guarantee [on uninsured deposits] implied will continue if things deteriorate meaningfully from here?” he said.
The Federal Reserve’s newly launched Bank Term Funding Program is somewhat of a wild card, according to Fitch Ratings. The central bank announced the lending facility Sunday as a way to help banks, credit unions and other eligible institutions shore up their liquidity. The Fed has pledged to make loans from 90 days to 12 months in duration.
In a research note Monday evening, the credit ratings agency said the program “will support system liquidity and reduce the risk of banks having to crystallize unrealized losses on high-quality but long-duration securities portfolios.”
“However, it remains to be seen whether these measures will be sufficient to stabilize investor and depositor confidence in other vulnerable institutions or whether additional measures will be needed,” Fitch analysts wrote.
Banks are taking different approaches in terms of easing potential customer concerns. One of the nation’s large regional banks, Citizens Financial Group, said it has seen “higher than normal interest from prospective new customers” and, starting Tuesday, would extend hours at several branches to “support potential new customers as they navigate ongoing market uncertainty.”
In a press release, the $226.7 billion-asset company, which is based in Providence, Rhode Island, said it is “committed to serving as its customers’ trusted financial advisor, with a long and proven track record of successfully navigating complex challenges and economic uncertainties.”
Other banks highlighted their financial positions. Merchants Bancorp in Carmel, Indiana, issued a press release, saying its “liquidity remains strong despite recent market concerns facing other financial institutions.” Michael Petrie, chairman and CEO of the $12.6 billion-asset company, said “the vast majority of [Merchants’] loan and securities portfolio have variable rates that reprice within 30 days” and said the company’s “model intentionally minimizes interest rate risk.”
Some smaller banks sought to distance themselves from the drama. John Asbury, CEO of the $20.5 billion-asset Atlantic Union Bankshares in Richmond, Virginia, said companies like Silicon Valley Bank, Signature Bank and Silvergate Financial — which announced last week that it would wind down operations and self-liquidate — “are simply not reflective of most banks in America.”
“These were rapid-growth, nontraditional models that fundamentally appeared to have unstable deposit bases,” said Asbury, who noted that the turmoil has had limited impact on Atlantic Union.
“I’ve always said throughout my career that banks fail for one reason: bad credit. I think what is happening now is … another option,” Asbury said. “That would be unstable deposit bases.”
The plan unveiled by the Treasury Department and banking regulators Sunday came as a relief to some depositors of Silicon Valley and Signature banks. The failure of Silicon Valley Bank left Abdeslam Afras without access to the cash he had raised in preparation for the launch of his San Francisco-based personal coaching app, Wellavi, and also left him without use of his Silicon Valley-issued credit card.
The upheaval has shaken his faith in the safety and strength of the U.S. financial system, he said.
“It’s all based on trust,” Afras said. “It’s money, and without it I am simply dead.”
John Reosti and Claire Williams contributed to this story.