In 1939, politician Frederic Coudert said, “May you live in interesting times.” This was not meant as a blessing. It was meant as a curse. And with the latest in bank failures and other financial turmoil, we are, indeed, living in interesting times.
NOTE: THIS REMAINS A BREAKING STORY; IT WILL UNDOUBTEDLY KEEP CHANGING
But Wait, I Thought We Were Done With Bank Failures for the Year
I was hoping for that as well. But it turns out that that is but wishful thinking. SVB’s parent company, SVB Financial Group, has filed for Chapt 11 bankruptcy protection. And on top of Silicon Valley Bank and Signature Bank, Silvergate Bank has also failed.
According to Bloomberg,
Crypto bros are quite literally becoming bankless and unbankable. By abruptly bundling crypto-friendly Signature Bank — one of the last of its kind — into receivership amid an extraordinary weekend operation to backstop the US banking system, regulators are sending a message that volatile tokens and decentralized finance need to be kept far away from TradFi. Given echoes of the global financial crisis and with market jitters spreading around the world, that’s no bad thing.
Wait, what does that mean?
Much like the subprime mortgage greed that led to the Great Recession in 2008, crypto has been risky but in much demand. And, at the same time, not too well regulated.
There’s every possibility that this will change. While my crystal ball is notoriously cloudy, the bottom line is that a lack of regulation for cryptocurrency is not helping matters.
The Writing Was on the Wall For Silvergate Bank
Also according to Bloomberg, fourth quarter 2022 losses in total deposits for SVB were 2.0%, and for Signature, they were 13.8%. But matters were far worse at Silvergate, where the losses topped out at a whopping 52.4%!
Evidently, the failure of FTX did not do Silvergate (or Signature, for that matter) any favors. Depositors bailed once they saw that FTX was banking with these banks—and that regulatory scrutiny was (and still is) on the way.
And, on January 27th, Silvergate suspended a Series A stock dividend. It was a sign of a troubled financial institution.
Banking regulators swooped into Silvergate quickly, to avoid more bank runs, like happened at SVB. But there was a run on the bank all the same, and Peter Thiel, among others, suffered losses from this commercial bank failure.
But there was already trouble in Crypto Land. Again per Bloomberg, Coinbase Global Inc., the US’s biggest crypto exchange, says it had $240 million in funds at Signature, while ex-Binance partner Paxos Global had $250 million in banking funds there.
So, where will cryptocurrency aficionados go in order to shelter their assets? If the US government gets its way, their banking will probably not be at some state bank in the United States. Will it be the Bahamas? The Cayman Islands? Switzerland?
A crypto bro doing banking in the Caymans (for example) might have more privacy. But they won’t have the protection of the Federal Deposit Insurance Corporation if there’s a banking failure there.
Silvergate is still listed on the New York Stock Exchange. But for how long after such a bank failure?
Which is the Chicken, and Which is the Egg?
According to CNBC, Silvergate was already looking to shut down banking operations a week before the crisis developed at SVB. So, did that bit of news help to foster a panic atmosphere among Silicon Valley Bank depositors?
On March 8th, the very day that Silvergate announced its woes, Activant Capital started to urge depositors to get out of SVB. The timing is … interesting.
But also note: in September of 2022, the Cayman Islands Monetary Authority listed both Activant Capital (two separate private funds, plus two under Activant Ventures) and Silvergate Ventures (one private fund).
But it’s not evidence of Activant doing anything to protect Silvergate at the expense of SVB, and they probably did not. These banks in Santa Clara and La Jolla, respectively, were already sliding into failure.
But Activant’s urge to depositors to get out of SVB definitely provided the grease.
Where the Bank Failures Go, Is Credit Suisse About to Follow?
Per The Financial Times, on March 5th, Chief Information Officer and long-time shareholder David Herro bailed on the Swiss financial giant.
The Financial Times said this was …
… after losing patience with its strategy amid persistent losses and a client exodus.
In February, Credit Suisse reported losses of over 7.3 billion in Swiss Francs (currently, a Swiss Franc is worth about $1.09 USD, so this loss works out to about $7.9 B USD).
And last November, Credit Suisse underwent a radical restructuring of its operations. The idea was to de-risk the investment bank and release capital for investment in Credit Suisse’s core businesses.
But on March 14th, they released their annual report for 2022. Annual revenue was down over $6 B from 2021, and the report detailed weaknesses in the firm’s financial controls.
According to Barron’s,
The report had been delayed after the Securities and Exchange Commission raised questions about its cash flow statements in 2019 and 2020.
And per Reuter’s, there was a failure to completely address issues with liquidity, which were raised in February.
Concerns about access to money and the failed bank’s ability to pay depositors were a big part of Activant telling depositors to pull out of Silicon Valley Bank.
Credit Suisse and a Failure of Confidence
The biggest issue for Credit Suisse was the loss of backing from its largest shareholder, Saudi National Bank. Investor’s Business Daily reported that Saudi National Bank would cease further financial intervention, in light of the issues uncovered in the 2022 annual report.
Confidence was falling in European banks as shares of UBS and Deutsche Bank fell. These are not small banks.
The confidence gap crossed the Atlantic and affected American banks as well. Shares of JP Morgan, PacWest Bancorp, Wells Fargo, and First Republic Bank all fell. Even Bank of America saw losses.
On the 15th, the Swiss central bank said it would shore up Credit Suisse. And then the Swiss Bank (UBS) said they would buy Credit Suisse for $3.2 B.
But that begs the question—how many times can it (or the US government) come to the rescue of banks?
First Republic Gets in on the Action…
… but not in a good way.
Among many other news outlets, on the 16th, Yahoo! Finance reported that First Republic Bank had gotten a $30 B infusion of cash from 11 banks.
JPMorgan, Bank of America, Citigroup (C) and Wells Fargo (WFC)—the four largest lenders in the U.S. by assets—deposited $5 billion apiece. Goldman Sachs (GS), Morgan Stanley (MS) each deposited $2.5 billion while U.S. Bancorp (USB), Truist (TFC), PNC (PNC), State Street (STT) and Bank of New York Mellon (BK) each deposited $1 billion.
But keep in mind: these deposits are uninsured. So, if First Republic continues to slide, then it’ll be a far tougher sell to the FDIC (and, by extension, the US government and the American people) to bail them out as well.
Evidently, these deposits have to stay at First Republic for 120 days—but what if First Republic needs the money now?
Much like individual depositors sometimes aren’t allowed to draw on funds in a new certificate of deposit or savings account for a few months, First Republic is just going to have to wait. And, if necessary, find cash elsewhere.
And, of course, this is another round of debt for them. S&P Global and Fitch Ratings have already downgraded this bank’s credit rating.
This loan is clearly not going to be open until the end of time. At some point, First Republic will have to pay back JPMorgan, etc. If they can’t, then Bank of America, etc. may come to the realization that they have purchased the most recent of the failing banks, lock, stock, and sinking barrel.
But the CEO of JPMorgan, Jamie Dimon (according to Yahoo! Finance) says he wouldn’t have bought Bear Stearns in 2008 if he knew then what he knows now. Other banks like Wells Fargo might also want to pass on actually buying First Republic.
… And Another Thing
On Friday, the 17th (Happy St. Patrick’s Day to all who celebrate), markets were already lower as a reaction to the news of this consortium of banks coming to the rescue of First Republic.
The Dow was in a position to end the week in the red.
Investors, much like you and me, are probably wondering: where does it all end?
And, at the same time, what will happen the next time?
At some point, all these hastily cobbled together safety nets generate a moral hazard.
What’s a Moral Hazard?
A moral hazard is when a financial institution fails to safeguard against risks because it knows there’s a good chance that someone will come to its rescue. That someone or something can be Congress, the FDIC, a consortium of banks, the Swiss central bank in the case of Credit Suisse, or the spare change in Bill Gates and Elon Musk’s couch cushions, for that matter.
A moral hazard also came about, even before SVB’s woes surfaced, due to the relaxation of the Dodd-Frank banking law. Under Dodd-Frank, banks were required to submit to more rigorous scrutiny, and hold more money in assets. But those rules were relaxed, and now we are all paying the piper.
As a result, on March 14th, Senator Elizabeth Warren and Rep. Katie Porter, with other Democratic lawmakers, introduced the Secure Viable Banking Act. Even if the bill is changed dramatically (changes in bills are normal) before passage (if it is passed), it should help to address some of the issues which created an environment allowing for bank failures to happen to SVB and Signature in particular.
But it takes a while to get a bill passed.
In the meantime, consumers may be losing confidence in smaller and regional banks, understandably concerned about the possibility of more bank failures.
Dangers and the Future
The international banking world is still reeling. But the worst just might not be over yet. On March 13, Erica Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru published a scholarly paper called, Monetary Tightening and U.S. Bank Fragility in 2023:
Mark-to-Market Losses and Uninsured Depositor Runs?
Erica Jiang is an Assistant Professor of Finance and Business Economics at the USC Marshall School of Business. Gregor Matvos is a Howard Berolzheimer Chair in Finance at the Kellogg School of Management, Northwestern University. Tomasz Piskorski is the Edward S. Gordon Professor of Real Estate in the Finance Division at Columbia Business School.
And Amit Seru is is The Steven and Roberta Denning Professor of Finance at Stanford Graduate School of Business, a senior fellow at the Hoover Institution and Stanford Institute for Economic Policy Research (SIEPR), and a research associate at the National Bureau of Economic Research (NBER).
These are some of the foremost experts in the field of economics.
What the paper essentially says is that there are a number of banks around the world which have less money on hand than SVB did. Or they have larger unrecognized losses. Now, keep in mind that a part of what made Silicon Valley Bank unique was the percentage of depositors with funds which exceeded the FDIC insured maximum. Only about 1% of all banks have a higher percentage.
According to the paper, there are a substantial number of banks which cannot cover all uninsured deposits if half of their depositors withdraw their funds and leave (i.e. there’s a run on the bank). This also affects the amount of money available to cover insured deposits.
Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to even insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values significantly increased the fragility of the US banking system to uninsured depositors runs.
Of the ten largest banks they investigated, one of them (they did not name names) has over $1 T in assets.
In short, expect more of these news stories.
Where’s the Confidence Amidst All These Bank Failures?
Cryptocurrency, actually. Shares of Coinbase Global were up. And crypto bank Circle Internet Financial took steps to shore itself up and improve its liquidity.
Then again, Steve Bannon’s $FJB cryptocurrency has caught the attention of Federal prosecutors in New York. At the same time, Europol seized the total assets of ChipMixer cryptocurrency amid allegations of money laundering.
Try finding a confident silver lining in that.
And if you think there’s confidence in Asia, think again. The Associated Press reports that Asian markets, just like the European and American markets, have fallen.
What Do These Bank Failures Mean to YOU?
Of course, if you had any money in a failed institution, you are directly affected. And while the purchase of Credit Suisse helps its depositors for now, its problems are far from minor. Its purchase ends a long run of success—it’s been part of economic history for over 160 years.
But even without a direct connection to these bank failures, you will likely still be affected.
For the tech companies which dominated the depositor rolls for these banks, the near future will likely bring with it some measure of financial austerity.
This is despite the Biden Administration stepping in and filling the gap between what the Federal Deposit Insurance Corporation provides in deposit insurance and how much was actually in SVB and Signature.
And beyond the Saudi bank, Credit Suisse’s biggest backers included Qatar Holding, Olayan Group, and BlackRock. All three of these large investment companies own considerable shares of stock and assets in companies you’ve heard of—MetLife, Apple, and Harrod’s.
Furthermore, a potential deepening and widening crisis of bank failures means that the Federal Deposit Insurance Corp and Federal Reserve System will be looking to slow down investments—and lender boards of directors will start insisting on higher standards for lending. This will likely be the case even at well-capitalized banks that don’t seem to be in danger of joining the legion of bank failures.
Look for minimum business loan requirements to start to rise. These can be in everything from minimum time in business to the lowest FICO scores that lenders and credit unions will accept. It can also mean more requests for paperwork like business tax returns and business plans.
The amounts on loan will likely also go down, and payback terms will most likely shorten. And if the Federal Reserve Bank keeps pushing to lower inflation, then interest rates will probably also rise.
Well, What Can YOU Do?
Building Fundability™ will always stand you in good stead. Following loan and line of credit requirements will never hurt your business, even when you line up your ducks earlier than you need to.
In fact, building business Fundability™ can help you attract and retain customers and prospects as a collateral benefit is that it bakes trustworthiness and legitimacy right into your small business.
Talk about your confidence boosters—for your customers and prospects, and lenders, but also for you!
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Building business credit will also help you. Working with Tier 1 business credit vendors (if you haven’t been doing so already) will improve your business credit scores, because this is trade credit that will report positive payment experiences.
Tier 1 is also a good bet because it doesn’t rely on banks.
If you’ve been happily establishing business credit with Tier 1, consider improving and enhancing your business credit portfolio and turning to Tier 2 and Tier 3.
And here’s a pro tip: if you’ve established a good payment history with a business credit card issuer, ask for a credit limit increase.
Will the Bank Failures Continue?
Expect monetary economics and banking journals like the American Economic Journal and the American Economic Review to continue reporting on any banking panic.
A large bank failure is always going to be newsworthy (just like the failure of Almena State Bank was back in the day), particularly the failure of a state bank or city bank. A bank panic will be, too, even when it leads to a small bank failure.
But right now, there is no good way of knowing if the bank failures will continue. Deposits are still safe, and the Federal Deposit Insurance Corporation is still covering insured deposits under the Banking Act of 1933.
The current interest rate you will pay is not contingent on the number of bank failures or bad loans out there. The Deposit Insurance Fund remains intact.
All you can do is keep your own business financials solid and that includes a strong business credit profile.
Credit Suite knows these may feel like dark times. Certainly, they’re interesting times. Contact us today to shine a light on what you can do to thrive even when the doomsayers are yelling louder than anyone else.