SVB and First Republic's problems aren't going away. Here's why.
Silicon Valley Bank's abrupt takeover by regulators on March 10 was followed by federal reassurances that all depositors — insured and uninsured alike — would get their money. Yet despite that guarantee, the turmoil in the banking industry has only grown, prompting an emergency cash infusion at another regional institution and a historic takeover of a "too big to fail" bank.
The tumult is raising the specter of the 2008 global financial crisis, which sparked the Great Recession and led to the loss of 8 million jobs and a housing crisis. The lessons from that painful chapter are prompting questions about whether the current banking problems could spread and pose a risk to the U.S. economy and to individual consumers' banking deposits.
"The word at a the top of everyone's mind at the moment is 'contagion': Will the troubles at SVB, [Credit Suisse], and others spread to the wider banking sector and lead to a 2008-like banking crisis?," said LPL Financial chief equity strategist Jeffrey Buchbinder and other LPL experts in a Monday research note.
Another 190 banks are in danger of failure even if half their uninsured depositors withdraw their funds, indicating that Silicon Valley Bank isn't alone in facing risks from a classic "run on the bank," according to a new analysis from researchers at Stanford, Columbia, Northwestern and University of Southern California.
Here's what to know about the ongoing banking turmoil and the risks it poses.
Why is SVB's failure still impacting the banking industry?
In a nutshell, it's because other banks share similar risks with Silicon Valley Bank, although not all to the same extent.
SVB's financial position grew less stable during the past year due partly to the Federal Reserve's series of interest rate hikes. While the central bank was aiming to tame the highest inflation in 40 years by raising rates, the actions had a secondary impact: the rate hikes lowered the value of U.S. government bonds, an investment commonly held by banks including SVB.
When SVB needed to shore up its financials earlier this month, it sold all of its available-for-sale securities — $21 billion in bonds. But because of the decline in bond valuations, SVB took a $1.8 billion loss on that sale, spooking depositors.
That sparked a classic bank run, with depositors hurrying to withdraw their funds from SVB — and two days after announcing the bond sale, the bank was shut down by regulators, who declared that it was insolvent.
Now, depositors at other banks and financial experts are questioning whether the same thing could happen at other institutions.
Could more banks fail?
Yes, according to the new report from researchers at Stanford, Columbia, Northwestern and University of Southern California.
Part of the issue is whether a bank has a high share of uninsured deposits, because depositors with funds above $250,000 — the threshold for FDIC insurance — stand to lose that money if the institution fails. That could put banks with a high share of uninsured deposits at a higher risk for a bank run, which in turn could lead to insolvency.
To be sure, SVB had a disproportional share of uninsured funds than other banks, with researchers finding that only 1% of banks had higher uninsured leverage. Yet, they added, uninsured deposit withdrawals could force more banks to sell their holdings in a "fire sale," putting them at risk of insolvency.
"Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to insured depositors, with potentially $300 billion of insured deposits at risk," they noted.
The researchers didn't disclose the names of the banks it identified as at risk, but noted that one large unnamed bank with assets of over $1 trillion could face insolvency issues if uninsured depositors withdrew funds.
How does Credit Suisse's problems play into this?
Many of Credit Suisse's problems were unique and unlike the weaknesses that brought down Silicon Valley Bank and Signature Bank in the U.S., including high interest rates.
Credit Suisse has faced an array of troubles in recent years, including bad bets on hedge funds, repeated shakeups of its top management and a spying scandal involving rival UBS, which on Sunday said it would buy Credit Suisse.
Analysts and financial leaders say safeguards are stronger since the 2008 global financial crisis and that banks worldwide have plenty of available cash and support from central banks. But concerns about risks to the deal, losses for some investors and Credit Suisse's falling market value could renew fears about the health of banks.
How do I know if my bank — and money— are at risk?
Bank runs are to some extent unpredictable, but experts recommend looking at your bank's financials, including its share of uninsured deposits, to help gauge risk.
As mentioned, SVB had a fairly high share of uninsured deposits, a trait that is shared by some other regional banks, such as First Republic. That information can be found in a bank's annual report by searching for the phrase "uninsured deposits."
Another issue to look for is the so-called Texas Ratio, according to DepositAccounts.com. This compares the total value of at-risk loans to the total value of available funds to cover these loans. Six U.S. banks and thrifts had a Texas Ratio above 100% in the fourth quarter, according to S&P Equity — all relatively small banks, including Tampa State Bank in Kansas and Bank of Lafayette in Georgia.
Deposits are insured up to $250,000 by the FDIC, therefore depositors with funds above that amount in a single account at one bank are at greater risk if their bank fails. There are several steps you can take to reduce that risk, though, such as opening accounts at several banks.
—With reporting by the Associated Press.
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