Plunge in regional bank stocks triggers spate of trading halts
bloomberg.com
bloomberg.com
But I don’t think people realize that no bank could have 25% (and counting) of deposits withdrawn in a day and survive.
If they had still been allowing withdrawals on Friday that number would be much much higher.
That's not "reality" though. The phenomenon of people "panicking" (ie acting sensibly when their savings are at risk and getting them out while they still can) is a fundamental part of the crisis-process of any bank when it is badly managed.
Saying "well if people just ignored history and group psychology and hope nothing bad will happen and risk all their savings by doing nothing, then nothing bad will happen" just isn't remotely realistic.
Silvergate, SVB and Signature were insolvent. This wasn't a fire sale prompting a decline in their asset values, i.e. classic illiquidity. It was their assets being worth less than their liabilities. If it were purely a liquidity issue, they could have borrowed at the Fed's discount window. (As First Republic appears to be doing.)
If the same thing happens to other banks - everyone withdraws, they shut down and the government steps in - the assumption is that their equity will eventually be worth $0 too. So, everyone sells at >$0.
It's not going to be all banks, though.
And there was a bank run because the investors panicked and caused the share price to plummet. Depositors saw stock plummeting, got nervous and pulled out. If this type of thing spreads to other banks we'll have a bad time.
It also simultaneously stepped in to preemptively save similarly-situated [0] banks, though.
[0] to the condition SVB was in which led ultimately to the bank run.
that would alone create some outflow even if the reason is not panic
If anything, I think the events of the last few days could reduce it somewhat. Better to have your funds safe earning little in a Big 4 bank than somewhere else with higher rates but now perceived to be risky.
And in SVB's case, a very small amount of withdrawals was enough to trigger insolvency. (As it forced the bank to sell, and thereby mark-to-market it's long-term treasuries.)
JPM has $500B of cash and cash equivalents on their $3T deposit base. Of which only ~$34B is in actual cash. Even JPM would fall (without Fed backstop) if JPM had that much withdrawals as a percentage of deposit.
Almost all of those withdrawals happened after the bank was insolvent.
SVB had to sell all of their available securities to cover day-to-day customer withdrawals (The problem with being the bank of choice for startups is that they aren't making any money, aren't getting any new investments, but are still spending money.)
The bank run started after SVB started dipping into its underwater long-term securities, and borrowing money, and doing emergency fundraising.
A more diversified bank (Like any of the big four) would avoid this problem, because their regular day-to-day activity would be a ~net-zero balance of withdrawals and deposits. SVB was uniquely vulnerable because of its undiversified customer base, where normal customer activity pushed it towards insolvency.
If depositors could/had to wait years, there wouldn‘t be a need for insurance anymore in this case.
I feel the exact opposite as you. Now that essentially 100% of deposits are guaranteed indefinitely, there is only downside to withdrawing.
I am sure that there are many people in my position holding a bunch of index funds trying to figure out if this is the beginning of something bigger or just a mouse fart that will be absorbed by whoever is SVB's creditor in the near future.
Some potentially soothing comments here from Brad McMillan, chief investment officer at Commonwealth Financial Network.
"This situation is something to keep an eye on, but it is not the start of the next financial crisis. Unlike in 2008, the government has stepped in early and stepped in hard. While we can certainly expect market turbulence — and we are seeing it this morning — the systemic effects will be limited. We are not set for a rerun of the Great Financial Crisis. This is not the end of the world."
Right this second, the S&P 500 is actually up by a very small amount.
Someone hasn't been following @Jason's Tweet fest this weekend.
Sounds familiar: https://imgur.com/a/LA5TePE
Also ignores the OP headline, stocks can't go down if they are in a trading halt.
The cost of doing nothing and being wrong is high.
(If you want to predict which of the things they will do, I would suggest paying attention to who bears the costs and who gets the benefits. The various choices differ most in that area. This is not entirely determinative, but it's been a pretty good guide for most of my lifetime.)
SBV bought 10-year term mortgage backed securities to earn yield on their cash holdings. When the risk-free interest rate started to exceed the yield on these assets, the MBS value declined. As a result SBV became insolvent.
Either it was an isolated, stupid move by a big bank who expected that interest rates would not rise, or they didn't care because of moral hazard.
My understanding is that the FED also announced they will loan money to banks that need to cover a shortfall due to haircuts to bond values caused by rate hikes, but that's just according to a tweet [1] from Thomas Massie an hour ago. I don't know the details of that arrangement.
[0] https://twitter.com/GRDecter/status/1634208659407351812
[1] https://twitter.com/RepThomasMassie/status/16353162211084492...
This was covered by a statement yesterday I think, as I read it in the FT this morning (on GMT).
Except the Fed announced a liquidity loan program for banks in such situations based on the par value of the assets, which prevents them from having to firsale them at reduced value, take the markdown, and risk insolvency.
SVB wouldn’t have collapsed if people didn’t lose faith and start withdrawing. Lehman collapsed without withdrawals.
I agree that many of the bank stocks are probably over valued. They're not going to rebound quickly.
The Fed can't control inflation. They can try to influence demand of goods and services by controlling interest rates, QE, etc. They cannot make up for the commodities supply deficiencies cause my Russia/Ukraine conflict. (Reduced supply of grains, oil, metals, etc.) Reduced supply also increases inflation.
We just had a run on the deposits of several banks. Next is a run on the stocks for the banks. (Financial institutions make up 7% of GDP) There are many institutions and retail investors who just received a message from Yellen and Powell that their investments are not safe. Even the big banks are falling. Migrating deposits to large banks will not stop the run on financial equities. It is already having a cascading effect on the broader market.
Surely the screw-up was reducing interest to 0% in the first place?
Once you do that, going back to any positive interest rate is an increase of infinity%.
Regional banks do not have a substantive underlying issue and do not deserve to die by a rotating regional bank panic.
“No narrow banks so we can encourage fractional reserve lending, but be responsible!” “Okay, fine, we’ll cover everything.” “Systemic risk!” “Narrow bank now pls?” “No! Fractional reserve lending responsibly!”
Credit Unions are owned by the members instead of shareholders and are non-profit but yea seems very similar to a regional bank. What else are different?
I do wonder though, why SVB became so large compared whereas a credit union like First Technology Credit Unit which manages 15 billion in assets. Wouldn't a credit union be a better fit since they are local at its core. And credit unions serve the financial needs of a specific group of people who share a common interest or affiliation (in this case Tech/VC firms in Silicon Valley).
There's also the 250k insurance but by NCUSIF instead of FDIC
Understood that small regional banks exist and it'd be senseless and disruptive to kill them off now, but if we take them as a historical artifact that we must live with, what actual advantages, in clean-sheet model, do they have, that would counter-act the poster's main point?
In those cases, a relationship between bank employees and the local residents mattered to establish trust between both parties.
Nowadays, a lot of high quality databases can do a lot of the work figuring out a borrower’s credit, so there is less need for those personal interactions, especially for something as simple as home mortgages.
Unless you need a ton of cash real quick (which is rare and getting rarer) it's perfectly convenient to keep using your regional bank even if you've moved across the country. If you do need the cash you call them and have them raise your ATM limit for a day. The overall amount of inconvenience per year is equal or less than dealing with some big stodgy national chain.
For Canada, while geographically large population wise it’s very small compared to the US. The big Canadian banks are targeting a similar sized demographic to California.
I’m less familiar with Europe, but I’m guessing most nations still have prominent national retail banks, with some having an EU wide market? Those national retail banks would effectively be regional in the US.
But many are quite big.
There are ~40 banks with assets over $200bn in Europe vs 15 in the US.
They're historically related to having shareholders which are also local, or backed by local foundations, or have special relationships with the local businesses (like the ones in Italy that will take a wheel of cheese or balsamic vinegar as collateral). Not "bank of $city" tho.
A nice smaller bank not only took me out for drinks but also got my PPP loan approved in a very short period of time.
That service was significantly better than all the combined service of the larger bank over the prior years.
Something, something trade-offs.... Always trade-offs.
I think that's one of those "citation needed" assertions. At least some explanation.
1) dead cat bounce in bank sector (recovery)
2) continued bank failures at public regional banks and power continues to consolidate at the "too big to fail" banks
I think the counter case is investors putting themselves into the shoes of a CFO at a company with >250k in cash. Why would they choose to park it at a regional bank rather than one of the big banks? Sure, FDIC made depositors whole this time, but does it have enough to continue doing that? If not, is there enough political will to push a taxpayer funded bailout through (especially this close to an election year)? And even then, how long would that take?*
*This excludes banks that are primarily dealing in consumer deposits, who I assume will be fine.
Imagine if that happened at multiple banks.
We really need to re-visit "too big to fail".