Breakingviews: A year on, SVB’s killer is still at large

Death came for Silicon Valley Bank the way it almost always does for doomed banks: by depositors fearful of losing their money rushing for the door. But that mortal moment, which unfolded a year ago this week, was the culmination of a process that started long before. The killer – a disjointed system that is supposed to oversee, save or wind up U.S. banks but in practice struggles to do any of the three – is still at large.

With the benefit of hindsight, California-based SVB Financial was a compendium of problems in the making. It had grown extremely quickly by relying on a small number of depositors, principally startups backed by venture capital firms. Over 90% of those had balances exceeding the Federal Deposit Insurance Corp’s guarantee, which protects customer savings up to $250,000 if a lender goes under. SVB had parked customers’ cash in long-dated government bonds that slid in value when interest rates rapidly rose. The upshot: when withdrawals mounted, it could not deliver, and closed its doors.

The collapse triggered a period of high anxiety. Bank shareholders and customers quickly twigged that in the age of social media and online banking, runs can happen in minutes. SVB lost a quarter of its deposits in 24 hours. Within days, Signature Bank – another big lender with a technology-skewed customer base – had failed too. In the following months First Republic collapsed, and PacWest found a buyer after its shares slumped by 60%.

One lesson was that regulators taxed with keeping banks safe had, in SVB and Signature’s case, dropped the ball. The Federal Reserve and FDIC watched risks pile up at both institutions, yet supervisors and their superiors had failed to put executives on a safer course. Once the immediate crisis passed, both regulators issued detailed yet essentially weak self-criticisms.

Twelve months on, investors are still worried about banks. The shares of four-fifths of the lenders which make up the FR U.S. Banks Index are lower than in early March 2023. Notable exceptions are JPMorgan, Customers Bancorp, and First Citizens Bancshares, all of which acquired parts of lenders that failed. The focus of anxiety has moved, though, from flighty depositors to wobbly real estate. New York Community Bancorp, which on Wednesday received a $1 billion equity injection from a consortium led by former Treasury Secretary Steven Mnuchin, passed through the SVB mini-crisis unscathed only to become a lightning rod for investor concerns over bad property loans. Exposure to commercial real estate has weighed on the share prices of lenders like Bank OZK and Valley National Bancorp.

What’s troubling is that even as banks weather new challenges in their loan books, many of the earlier flaws in the bank ecosystem remain. Bank oversight, for example, is still patchy. The U.S. has multiple regulators that share the job of watching lenders, depending on the institution’s type, location, and history. There are strengths in division. But if the agencies do not work together, or are not of equal quality, the system is weaker. NYCB’s problems only surfaced after oversight passed from New York’s state regulator to the federal Office of the Comptroller of the Currency.

After the bank failures of March 2023, the Fed and FDIC both acknowledged their staff had not been forceful or quick enough. Fed supervisory chief Michael Barr says examiners are now faster and more assertive. Even so no high-level heads have rolled. Moreover, the problem of overly shy regulators goes way back. Supervisors of Continental Illinois, which failed in 1984 after years of breakneck growth, later admitted that they had been too sheepish to push for necessary changes.

The mechanism for saving banks that get into trouble is also still glitchy. The main tool is the Fed’s discount window, which offers banks cash in return for them temporarily pledging assets like commercial loans and mortgages. Most financial firms do not want to use this facility as it might signal distress. Worse, banks including SVB and Signature weren’t ready when they needed it.

There’s hope on that front. The Fed now encourages – though still does not compel – banks to get ready to tap at the window. But the stigma remains, as it has for nearly a century, the New York Fed noted in a recent study. After SVB failed, the Fed set up an alternative lending facility that let banks borrow against Treasury bonds on lavishly generous terms. That program expires on March 11, but if banks again hit the rocks, the central bank would have to fire it up again.

And if a bank does hit the wall, there’s still ambiguity about who gets protection. Around 40% of all bank deposits are above the FDIC insurance limit, but regulators have sent a signal that they will protect wealthy customers regardless. When SVB and Signature failed, the FDIC invoked a special crisis clause that lets it rescue every depositor to avoid a wave of bank runs. It is hard to see how regulators could avoid doing the same if another large bank begins to unspool.

The FDIC proposed some alternatives, including raising the limit on insurance for corporate bank accounts used to pay employees and suppliers. That is what happens in Japan and used to be the case in the United States. The change would require Congress to act, however, and lawmakers show little appetite for such things. Banks have meanwhile set up reciprocal agreements that carve up depositors’ balances and parcel them out in small chunks. That is how NYCB can say that its $23 billion of uninsured deposits could almost all, in a pinch, be insured.

Lightning ought not to strike twice. Investors, supervisors, and analysts are now undoubtedly more alert to risks like uninsured deposits, customer concentration and interest-rate vulnerabilities. So long as all depositors enjoy de facto protection, there is no reason for bank runs to happen at all. Even an 80% fall in NYCB’s share price in little more than a month didn’t send customers running. But that does not neutralize the weaknesses in supervision, rescue and resolution that linger a year after SVB’s grisly demise. When the next bank inevitably fails, the culprits will be all too familiar.