“Like the ripples from a stone tossed into the pond from the water’s edge, the effects of our choices extend infinitely outward. Even the smallest of acts reverberates in the ears of unwritten histories.” Justin Young
For Silicon Valley Bank, the nation’s 16th largest bank, and Signature Bank, the nation’s 29th largest bank, the ripples began during the pandemic leading to the government takeover of what most people thought were two of the more stable banks in the marketplace.
The Silicon Valley Bank Story: During the pandemic, start-up activity was at a high, with a record $621 billion raised from VC’s during 2021 alone, in addition, many Americans were trapped at home, so they socked more money away into savings. As a result, Silicon Valley Bank (SVB) saw their deposits more than double. During that time, the Federal Government, to keep the economy from collapsing during COVID, pumped approximately $5 trillion into the economy, slashed the Federal Funds Rate to almost 0%, and started purchasing billions of dollars of treasuries and mortgage-backed notes every month. This pushed inflation rates up to near-record levels. To curb inflation, the federal government began raising interest rates, making the cost of borrowing more expensive, and slowing down the level of VC investment. Meanwhile, the start-ups and consumers continued to utilize the cash invested at SVB, eroding cash levels at the bank.
Banks make most of their income from interest on investments and the spread between what they pay consumers and what they lend money out at. SVB had a high level of funds in mortgage-backed securities classified on their balance sheet as held-to-maturity (“HTM”) securities. These investments were at low fixed interest rates. As the federal government raised interest rates, these low-interest investments declined in value. Based on SVB’s financial statements for 2022, SVB’s invested securities declined in value by approximately $17.5 billion. In addition, as depositors continued to pull money, SVB was forced to sell investments and recognize real losses. On Wednesday, March 8th, SVB announced that it was doing a $2.25 billion stock sale. On the news of the sale, VCs advised their portfolio companies to withdraw any funds in excess of FDIC-insured limits from SVB and transfer them to another bank. On Thursday, customers tried withdrawing $42 billion from the bank leaving the bank with a negative $1 billion in cash and prompting a regulator take-over of the bank.
The Signature Bank Story: The Signature story is still unraveling as the FDIC only took over the bank on Sunday, March 12th. On the heels of the SVB take-over, the banking industry saw a decline in the market value of banks to the tune of $100 billion and saw significant concerns from depositors who are fearful of losing their deposits. As a result, many banks saw large withdrawals over the last several days. With Signature’s large commitment to the cryptocurrency industry and the significant declines in crypto pricing, the large level of withdrawals triggered large losses and a lack of adequate cash to meet withdrawals. More information will emerge over the next few days.
What does this mean to you: For both SVB and Signature, the FDIC has stated that it will make all depositors whole, to ensure that they receive all the money deposited with the banks and senior leadership of both banks has been removed. In addition, both banks have been transferred to “bridge banks” that will continue to operate in place of SVB and Signature. All checks will be cleared through the bridge banks and all outstanding debt will need to be repaid to the bridge banks. The bridge banks are temporary as the FDIC markets the institutions to potential bidders. The Federal Reserve Board announced that it will make additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.
As consumer concerns continue to fuel behavior, it is possible that other banks with high levels of HTMs will have a similar fate to SVB and Signature Bank, however, the swift actions of the FDIC will hopefully quell some of those fears. The liquidity facility placed in service by the Fed should allow other institutions, if faced with similar runs, to not have to immediately sell at a loss and therefore should stabilize any future losses.
Lessons learned: We too often take things for granted … it’s a bank my money is safe. The recent banking problems show that we always need to be prudent in our decisions. So, what are our takeaways:
- It makes sense to diversify banking relationships. This doesn’t mean that if you have $2 million dollars you should have 8 different banks each at the FDIC limit; consider having a backup plan. Have the primary bank that you work with, with a secondary bank that is available to you and with who you have a relationship with also. This will provide flexibility on borrowing, fees, credit cards, interest rates, and more. It will also ensure that if there is a crisis that occurs (cyber security, technology, etc.) at the bank level, you have a fallback position.
- Do your due diligence on your banking partners. Gain an understanding of their financial strength by reviewing their annual 10K filings.
Parting thoughts: It is anticipated that based on the bank failures that the federal government will delay its next interest rate hike. In addition, if you are required to produce audited or reviewed financial statements, expect to see some enhanced risk disclosures surrounding cash and holdings.
We know that these are stressful times. If you have any concerns or need any advice, we are here for you … stay connected.
Kenneth R. Cerini, CPA, CFP, FABFA
Managing Partner
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.