Over the weekend of March 11-12, there was some hope that the FDIC would step in like George Bailey and rescue Santa Clara-based Silicon Valley Bank. That was Santa Clara University (SCU) economist Robert Hendershott’s prediction on Friday, March 10.
But on the morning of March 13, it was clear that wasn’t happening. In fact, another bank was shut down over the weekend, and others teetering on the verge of collapse.
It’s a signal that we’re in for a bumpy ride, according to Hendershott.
“By shutting banks, regulators are saying that you can get closed down even if you have uninsured deposits,” he said. “When they announced $70B backstop for First Republic Bank, you would have thought that things would calm down, but bank stocks tumbled. Even with the special treatment First Republic got their stock tumbled.”
But we’re also not likely to see a bank panic à la the great depression, nor a rapid succession of bank failures as in the 2008–2009 banking crisis, says Hendershott.
“The situation of the banks that have failed is quite different from the banks that you and I use for our domestic finances,” said Hendershott.
It started with interest rates.
“Since the financial crisis of 2008, interest rates have been very low, and in the period starting with COVID, interest rates went to zero,” he said. “There was a lot of money being made available to people through COVID programs and not a lot of ways to spend it, so it was parked in a bank and the banks invested in Treasury Bills locked into low interest rates. That’s fine if you’re not paying much on deposits.
“Now interest rates are going up and customers want a higher interest rate but bank assets are tied up in a low rate,” Hendershott continued. “It’s a challenge, but most banks can manage it given time because retail banks make many kinds of loans and have a diverse customer base.”
At Silicon Valley Bank, everything was on turbo.
When startups are getting investments, the deposits roll in.
“But then the money stops coming in, the deposit rate starts to shrink,” said Hendershott. “Banks have to have balanced books, so when deposits shrink you have to sell assets, and you have to sell at a discount. If you have to sell quickly, it turns into a fire sale and you go bankrupt.
“They bought Treasury Notes, bonds, mortgage-backed securities at low rates,” continued Hendershott. “Then they also got hit with the Silicon Valley downturn. In the last year, bank deposits have shrunk for four consecutive quarters.”
As in other banking crises, psychology helped drive this one. But Hendershott says this is probably the first social media driven bank run.
“If tech startups had to go to the bank and wait in line to get their money out, they probably wouldn’t,” he said. “All of those CEOs and VCs wouldn’t go stand in line. What made it happen was social media. Now it takes 20 seconds. Silicon Valley Bank could have muddled through it if they had a few years.”
The bottom line?
“If you are a business bank, the banking crisis is not over,” said Hendershott. “The FDIC response over the weekend didn’t reassure the industry. It could have been over Monday, but it wasn’t. It’s evolving.”