As Big Bank Closures Continue, Regulatory Issues Ensue

The American financial sector was shaken in the month of March following a series of major banking failures that led to the demise of several notable financial institutions, leaving many to speculate as to the overall health of the domestic banking system. The turmoil began with the unprecedented implosion of Silicon Valley Bank (SVB), which ultimately saw California-based financial regulators close the firm while taking control of its deposits. The failure of SVB came as a major shock to the industry, as the bank had long been a key lender operating on behalf of the public and private tech sectors as well as to the venture capital community. With global inflation figures still elevated and interest rates continuing to rise, the latter had been under significant pressure of late – this as a major slowdown for initial public offerings (IPOs) over the last 18-months made it far more difficult for the firm to raise additional capital, all while treading water from the perspective of asset sales. The move that ultimately sealed the bank’s fate was their futile announcement of a capital raising effort that included the selloff of over $20 billion in securities at a loss over approximately $1.8 billion, a move which ultimately brought on a $42 billion run on banking deposits just one day before the bank was shuttered.  All told, the shutdown of SVB marks the largest U.S. bank failure since the 2008 financial crisis, and the second largest overall bank failure in the history of the United States.  

            In the days following the shutdown, the U.S. Treasury Department and Federal Reserve decided to step in on behalf of the firm’s customers impacted by these developments rather than bailing the bank itself out. While the FDIC’s standard insurance covers up to $250,000 per depositor at each respective FDIC-insured financial institution, the regulator also added that uninsured depositors would ultimately acquire receivership certificates for their balances, while paying these uninsured customers an advanced dividend within a week of the March 10th bank closure date.³ The status of any additional funds in excess of the insured $250K threshold with SVB remain up in the air however, and many of the tech firms linked to the failed bank now face concerns of potential shutdowns and operational changes in their own right as a result.

            The shakeup did not end there however. Just two days later, New York state regulators shut down Signature Bank, another major player in the tech space which also holds direct ties to the growing crypto industry. Coined a “systemic risk exception”, the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation announced that banking customers of Signature Bank would also still have full access to their deposits as part of an emergency program to backstop all deposits at the firm under the Fed’s emergency lending authority.¹ The bad news however is that while depositors will still have access to their funds, equity and bondholders at both Signature and SVB will officially be wiped out, per the Treasury. Signature had been the second largest crypto-centric bank in the United States next to Silvergate, which ironically announced an impending liquidation in early March. While these shutdowns came as part of an effort to prevent the further spread of a possible banking crisis, additional chaos has unfolded over the last several weeks at the global level. In addition to American firm First Republic Bank being in major trouble as possible government intervention hangs in the balance, across the pond once-prominent banking staple Credit Suisse (the world’s 45^th largest bank in terms of total assets and one deemed “systemically important” to the health of the international banking system by the Financial Stability Board) too fell victim to the banking confidence crisis, ultimately leading to its acquisition by UBS – Switzerland’s largest bank earlier this month. Now Deutsche Bank – Germany’s largest lender – also faces potential turbulence in its quest to stave-off a possible closure, this after battling back to prominence following a string of major money laundering scandals seen in recent years.

            While additional regulatory headwinds are likely to be faced overseas amid ongoing liquidity challenges, the Biden administration has thus far refused to refer to their actions to date as a true “bailout”, perhaps as to not create a *more* heightened state of financial fear. They are also claiming that taxpayers will not be covering the costs of the Treasury and Fed’s intervention, this despite the money being utilized to date coming from the FDIC’s Deposit Insurance Fund – a reserve that is maintained via quarterly assessments on insured banks. Financial experts have thus far disagreed with the verbiage being used by government spokespeople. “The very idea of bailing out SVB, Signature Bank and others, without costing taxpayers, doesn’t even pass the smell test,” said EJ Antoni, research fellow in regional economics with The Heritage Foundation’s Center for Data Analysis. “The government is spending taxpayer dollars. By definition, that costs the taxpayer,” Antoni said.²

            This is not the first time that Biden & Co. have attempted to redefine terms as part of their public relations strategies in order to alter perception. In 2022 the current administration infamously attempted to redefine the definition of a recession—an economic term widely recognized as back-to-back quarters of negative GDP growth. The current administration (as well as those of their international counterparts also mired in this unique situation) face a choice regarding to what extent they will continue to intervene in cases of failing banks, especially as the fallout from deposit runs and free-falling stock positions progress and public pressure increases. From a regulatory perspective, industry experts believe that financial regulators both domestically and abroad must continue to improve their supervision over firms within their jurisdictions with respect to liquidity and deposit mixes in order to avoid similar situations in the future. It remains to be seen however whether regulators will choose to keep current regulations in place while increasing their liquidity oversight or if they will choose to implement tighter capital requirements for covered financial institutions.

Citations

1. Li, Yun. “Regulators Close Crypto-Focused Signature Bank, Citing Systemic Risk.” CNBC, CNBC, 13 Mar. 2023. 
2. Miller, Andrew. “Biden’s Claim That Silicon Valley Bank Bailout Wouldn’t Cost Taxpayers Contradicts Fiscal Reality: Economist.” Fox Business, Fox Business, 15 Mar. 2023. 
3. Pound, Jesse. “Silicon Valley Bank Is Shut down by Regulators in Biggest Bank Failure since Global Financial Crisis.” CNBC, CNBC, 11 Mar. 2023.