Axios Pro Rata

A green watering can with a dollar sign painted on it.

May 06, 2023

Good morning! I know, I know, I'm writing about banks again... but it's truly an unusual situation, and one that we should keep at eye on.

  • 🚨 As you already know, we're hosting our next BFD event in San Francisco (my city!) next Wednesday, and I hope you'll join us virtually for the amazing interviews we'll bring you. Catch me sitting down with ARK Invest's Cathie Wood and Y Combinator's Garry Tan!
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Today’s Smart Brevity™ count is 947 words, a 3½-minute read.

1 big thing: A tale of two failed Bay Area banks

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.”

2. What we're watching

illustration of a caution sign surrounded by red and green rectangles with dollar bills overlaid on them

Illustration: Tiffany Herring/Axios

Federal Reserve chair Jay Powell said earlier this week that the U.S. banking system is "sound and resilient" — but investors and economy watchers aren't so sure.

Driving the news: More regional banks were hit this week with lower investor confidence and with markets punishing their shares in the absence of any real bad news. This prompted the White House to warn that it was examining possible "manipulation" of stocks, and fanned speculation of a potential ban on short sales.

  • PacWest: The Los Angeles-based bank saw its stock swoon on Wednesday, and sought to reassure investors that it didn't see significant deposit outflows. However, it confirmed that it's exploring strategic options, including a possible sale.
  • Western Alliance: The Phoenix-based bank saw its shares drop following a Financial Times report that it was exploring a sale of all or parts of its business. The bank promptly denied the report and even noted that it's "considering all of our legal options in response to today’s article."
  • Other regional banks' shares also fell, though not as deeply as those mentioned above.

My thought bubble: The Bay Area (and California at large) has many more regional banks. At this point it's hard not to think that they could meet the same fate, regardless of whether they deserve it.

Yes, but: The regional bank stocks bounced back on Friday.

📚 Due Diligence

  • Why First Republic Bank collapsed (WSJ)
  • We can see the future, and it has bigger banks (Axios)
  • SVB tapped Home Loan Bank for $15 billion in funding at end of 2022 (WSJ)
  • Are Federal Home Loan Bank advances a sign of distress? (American Banker)

🧩 Trivia

In lieu of trivia this week, send me your predictions: Will we see more bank failures (or acquisitions to avoid failure)?

🧮 Final Numbers

Data: FDIC and FRED; Chart: Rahul Mukherjee/Axios;
Data: FDIC and FRED; Chart: Rahul Mukherjee/Axios;

The mini banking crisis of 2023 really is pretty small, as banking crises go, writes Axios' Felix Salmon.

Why it matters: The Fed was at pains to point out Wednesday that "the U.S. banking system is sound and resilient." This chart begins to explain why they might be so sanguine.

By the numbers: The three banks that failed this year — SVB, FRB and Signature Bank — accounted for 2.4% of all assets in the banking sector.

  • By contrast, Washington Mutual alone had more than 2.7% of the sector's assets when it failed in 2008.
  • The global financial crisis was also much broader and lasted for years. Between the failure of IndyMac in July 2008 and the demise of The National Republic Bank of Chicago in October 2014, a whopping 501 FDIC-insured banks failed, collectively comprising more than 6% of the assets of the commercial banking sector.

Between the lines: The market did a pretty good job of shrinking both SVB and FRB before they failed. For this chart, we've used their actual assets at failure, rather than the FDIC numbers as of year-end 2022.

  • In the case of FRB, assets fell from $229 billion at year-end to $207.5 billion when it failed.

The bottom line: Even if you include Silvergate Bank, the crypto bank that shut down without failing, the 2023 banking crisis remains reasonably contained... for the time being.

🙏 Thanks for reading! And to Javier E. David and Amy Stern for editing. See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and community bankers to sign up.