The lightning strike of the SVB shakes the banking industry

By Pete Schroeder and Nupur Anand

WASHINGTON/NEW YORK (Reuters) – The rapid dissolution of SVB Financial Group has caught the banking industry by surprise after years of stability.

Friday’s collapse, the biggest bank collapse since the 2008 financial crisis, had a unique set of circumstances but raised questions about hidden weaknesses that could impact customers and employees and potentially reveal problems at other banks.

SVB’s plight could result in a loss of confidence, tighter regulation and investor skepticism about the financial health of smaller banks, which were seen as adequately capitalized after regulators forced banks to hold more capital following the 2008 crisis, said experts.

Sheila Bair, who ran the Federal Deposit Insurance Corp (FDIC) during the global financial crisis, said in an interview that bank watchdogs are likely to now turn their attention to other banks that may have large amounts of uninsured deposits and unrealized losses, two Factors that contributed to the rapid collapse of the SVB.

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

A series of events caused SVB to fail, including selling US Treasury bonds to stem funding costs on expectations of higher interest rates, resulting in a $1.8 billion loss. SVB, which traded as Silicon Valley Bank, also had 89% of its $175 billion in deposits uninsured at the end of 2022. The FDIC insures deposits up to $250,000.

Investors and customers now have to wait and see whether SVB Bank will quickly find a buyer. During the 2008 financial crisis, Washington Mutual found a buyer immediately. But for IndyMac, it took about eight months in 2009.

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

“Banks are opaque, so we all immediately think, ‘Wait a minute, how closely is this bank connected to another,'” said Mayra Rodríguez Valladares, a financial risk consultant who trains bankers and regulators. “Investors and savers don’t want to be the last to turn off the lights in the room, so they have to go.”

stricter rules

Several experts said any domino effects on the rest of the banking sector could be limited. Larger institutions have more diverse portfolios and customer deposits than the SVB. The SVB also had a high dependency on the startup sector.

“We don’t think there’s a risk of contagion for the rest of the banking sector,” said David Trainer, CEO of New Constructs, an investment research firm. “The big banks’ deposit base is much more diversified than at SVB and the big banks are in good financial shape.”

Jason Ware, chief investment officer at Albion Financial Group, said ties to the broader banking system are limited, but “this situation may have implications for select regional banks with some direct exposure.”

Other experts said the failure could help US regulators’ efforts to tighten the rules.

The banking sector weathered the COVID-19 pandemic, thanks in part to stricter rules introduced after 2008. However, some rules were relaxed during President Donald Trump’s administration.

Those simpler rules for regional banks are likely to come under closer scrutiny as regulators want to make sure they too have enough cushions to weather similar stresses, some regulator and industry sources said.

Senator Elizabeth Warren, a prominent banking critic, tweeted that the bank’s failure “underscores the need for tough rules to protect the financial system.”

A particular focus could be larger regional banks, which have seen some rule relaxations under the Trump administration. US banking regulators said in October they are considering new requirements for large regional banks, including holding more long-term debt to absorb losses.

“It feels like the market is looking first to regional banks that don’t have credit diversification,” said Greg Hertrich, head of US depository strategy at Nomura.

Another requirement that could attract more attention, according to industry sources, was the expansion of banks to account for the market value of securities held. This requirement currently only applies to banks with assets over $250 billion, but could be extended to other companies.

On Monday, FDIC Chairman Martin Gruenberg warned bankers gathering in Washington that companies are facing higher unrealized losses as rapid interest rate hikes have pushed the value of longer-dated securities lower.

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

(Additional reporting by Noel Randewich in Oakland, California; writing by Megan Davies and Lananh Nguyen in New York; editing by Shri Navaratnam)


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