A tale of two failed Bay Area banks
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Illustration: Shoshana Gordon/Axios
Something’s in the water in the San Francisco Bay Area, at least as far as embattled regional banks are concerned.
The big picture: In less than eight weeks, two Top 20 banks based in the same small corner of Northern California failed — and the similarities between their businesses, and the circumstances surrounding their collapse, run deeper than these basic facts.
Flashback: As soon as Silicon Valley Bank was taken over by regulators, scrutiny turned to First Republic Bank.
- The company quickly tried to avoid SVB’s fate by reassuring investors and customers via statements about its liquidity, and adding support from large banks.
Zoom in: Both companies’ downfalls were the result of some of the same issues and circumstances, Brookings Institution senior fellow Aaron Klein tells Axios.
- Federal Home Loan Bank of San Francisco: SVB and FRB were its top two largest borrowers at the end of 2022, with $15 billion and $14 billion in loans outstanding, respectively. The FHLB system usually acts as a backstop to banks in need of liquidity, to help stave off collapse and contagion.
- Interest rates: The low-interest rate environment — and subsequent reversal in the past year — affected both companies, albeit differently. SVB’s misguided bet on a portfolio of bonds ultimately alarmed investors when it led to a $1.8 billion loss. FRB, meanwhile, took advantage of the low interest rates to give its wealthy customers sweetheart deals on home mortgages — loans that eventually were bad deals for the bank when rates went up.
- Uninsured deposits: Both banks relied heavily on a high volume of uninsured deposits. SVB’s 10 largest deposits held more than $13 billion in the aggregate, according to the FDIC, and about 94% of its deposits were uninsured. FRB, whose customers were primarily wealthy individuals and their businesses, similarly had about 67% of its deposits uninsured.
Between the lines: “These aren’t typical regional banks,” explains Klein, suggesting their categorization as “regional” is mostly technical.
- They aren’t regional banks that serve mostly ordinary people like, say, community banks. Their customers are a unique slice of the economy, and that exposed them to certain risks, like unstable sources of financing.
The bottom line: “There’s a real concern that the contagion is going to take down healthy banks,” adds Klein. “There was too much confidence in bad banks, and now there’s too little confidence.”
