#Bank Failure

[newyorkthegoldenage]

Angry depositors gathered in front of the Clarke Brothers Bank, an 80-year old private institution at 154 Nassau St., which closed as bankrupt, ca. 1929. Unprecedented withdrawals caused the crisis, and the payment of 100 cents on the dollar was promised to the skeptical depositors.

Photo: Bettmann Archive/Getty Images/Fine Art America

[dreaminginthedeepsouth]

Max Gustafson

* * * *

LETTERS FROM AN AMERICAN

March 12, 2023

Heather Cox Richardson

At 6:15 this evening, Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and Federal Deposit Insurance Corporation (FDIC) Chairman Martin J. Gruenberg announced that Secretary Yellen has signed off on measures to enable the FDIC to fully protect everyone who had money in Silicon Valley Bank, Santa Clara, California, and Signature Bank, New York. They will have access to all of their money starting Monday, March 13. None of the losses associated with this resolution, the statement said, “will be borne by the taxpayer.”

But, it continued, “Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”

The statement ended by assuring Americans that “the U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today's actions demonstrate our commitment to take the necessary steps to ensure that depositors' savings remain safe.”

It’s been quite a weekend.

On Friday, Silicon Valley Bank (SVB) failed in the largest bank failure since 2008. At the end of December 2022, SVB appears to have had about $209 billion in total assets and about $175 billion in deposits. This made SVB the sixteenth largest bank in the U.S., big in its sector but small compared with the more than $3 trillion JPMorgan Chase. This is the first bank failure of the Biden presidency (while Donald Trump Jr. tweeted that he had not heard of any bank failures during his father’s presidency, there were sixteen, eight of which happened before the pandemic). In fact, generally, a few banks fail every year; it is an oddity that none failed in 2021 or 2022.

The failure of SVB created shock waves for three reasons. First, SVB was the major bank for technology start-ups, so it involved much of a single sector of the economy. Second, only about $8 billion of the $173 billion worth of deposits in SVB were less than the $250,000 that the FDIC insures, meaning that the companies who had made those deposits might not get their money back quickly and thus might not be able to make payrolls, sparking a larger crisis. Third, there was concern that the problems that plagued SVB might cause other banks to fail, as well.

What seems to have happened, though, appears to be specific to SVB. Bloomberg’s Matt Levine explained it most clearly:

As the bank for start-ups, which have a lot of cash from investors and the initial public offering of stock, SVB had lots of deposits. But start-up companies don’t need much in the way of loans because they’ve just gotten so much cash and they don’t yet have fixed assets. So, rather than balancing deposits with loans that fluctuate with interest rates and thus keep a bank on an even keel, SVB’s directors took a gamble that the Federal Reserve would not raise interest rates. They invested in long-term Treasury bonds that paid better interest rates than short-term securities. But when, in fact, interest rates went up, the value of those long-term bonds sank.  

For most banks, higher interest rates are good news because they can charge more for loans. But for SVB, they hurt.

Then, because SVB concentrated on start-ups, they had another problem. Start-ups are also hurt by rising interest rates because they tend to promise to deliver returns in the long term, which is fine so long as interest rates stay steadily low, as they have been now for years. But as interest rates go up, investors tend to like faster returns than most start-ups can deliver. They take their money to places that are going to see returns sooner. For SVB, that meant their depositors began to need some of that money they had dumped into the bank and started to withdraw their deposits.

So SVB sold securities at a loss to cover those deposits. Other investors panicked as they saw SVB selling at a loss and losing deposits, and they, too, started yanking their money out of the bank, collapsing it. Banks that have a more diverse client base are less likely to lose everyone all at once.

The FDIC took control of the bank on Friday. On Sunday, regulators also shut down Signature Bank, based in New York, which was a major bank for the cryptocurrency industry. Another crypto-friendly bank, Silvergate, failed last week.

Congress created the FDIC under the Banking Act of 1933 to restore trust in the American banking system after more than a third of U.S. banks failed after the Great Crash of 1929, sparking runs on banks as depositors rushed to take out their money whenever rumors suggested a bank was in trouble, thus causing more failures. The FDIC is an independent agency that insures deposits, examines and supervises banks to make sure they’re healthy, and manages the fallout when they’re not. The FDIC is backed by the full faith and credit of the government, but it is not funded by the government. Member banks pay insurance dues to cover bank failures, and when that isn’t enough money, the FDIC can borrow from the federal government or issue debt.

Over the weekend, the crisis at SVB became a larger argument over the role of government in the protection of the economy. Tech leaders took to social media to insist that the government must cover all the deposits in the failed bank, not just the ones covered under FDIC. They warned that the companies whose deposits were uninsured would fail, taking down the rest of the economy with them.

Others noted that the very men who were arguing the government should protect all the depositors’ money, not just that protected under the FDIC, have been vocal in opposing both government regulation of their industry and government relief for student loan debt, suggesting that they hate government action…except for themselves. They also pointed out that in 2018, under Trump, Congress weakened government regulations for banks like SVB and that SVB’s president had been a leading advocate for weakening those regulations. Had those regulations been in place, they argue, SVB would have remained solvent.

It appears that Yellen, Powell, and Gruenberg, in consultation with the president (as required), concluded that the collapse of SVB and Signature Bank was a systemic threat to the nation’s whole financial system, or perhaps they concluded that the panic over that collapse—which is a different thing than the collapse itself—was a threat to the nation’s financial system. They apparently decided to backstop the banks to prevent more damage. But they are eager to remind people that they are not using taxpayer money to shore up a poorly managed bank.

Right now, this appears to leave us with two takeaways. The Biden administration had been considering tightening the banking regulations that were loosened under Trump, and it seems likely that the need for the federal government to step in to protect the depositors at SVB and Signature Bank will make it much harder for those opposed to regulation to keep that from happening. There will likely be increased pressure on the Biden administration to guard against helping out the wealthy and corporations rather than ordinary Americans.

And, perhaps even more important, the weekend of panic and fear over the collapse of just one major bank should make it clear that the Republicans’ threat to default on the U.S. debt, thus pulling the rug out from under the entire U.S. economy unless they get their way, is simply unthinkable.

LETTERS FROM AN AMERICAN

HEATHER COX RICHARDSON

[prophet-one]

SVB bank failure

I comprehend the reason why SVB failed: its a classic bank run where the bank does not have the liquid assets to fund withdrawals. This the “other shoe dropping” wrt the rapid increase in interest rates.

what stands out to me are two questions: why do companies have that much cash in the bank? How did the financial markets in general fail?

The SVB failed because the financial markets are NOT working. The markets are not providing suitable securities for companies to park their excess cash. SVB was probably seen as a “safe” place to store cash. That assumption is obviously false. 

Question: why did the corporate depositors have so much money in cash accounts versus other securities?

Two months ago I was discussing cash management with my financial advisor. The key point he made about Bonds and funds that invest in bonds, is to use rolling maturity. The bond values will lag the market (especially with rapid changes in interest rates), but you wont lose principle. (BTW the change in bond values has to do with the liquidity price not the book value... if you hold bonds to maturity, then you dont lose value). So, back to the question about the depositors... when you have a billion plus of cash to invest you should be able to do something better than stash it in a low interest chequeing account. Something doesnt seem right about that.

Question: why do corporate depositors have so much cash on hand in the first place?

The financial markets “should” provide companies with cash “when and as” they need it through equity and bonds and loans. When a company like Roku has over a billion dollars sitting around “just in case they need it”, this is a clear sign that the financial markets are not working. Different sectors have different requirements for liquidity; but having 2 to 5 years of excess cash on hand is well beyond any reasonable requirement.

I completely understand that companies like the security blanket of having 2 or 3 or 10 years of cash sitting around. However, that is a total waste of shareholder resources, given that shareholders can make better investments with that cash. There is supposed to be a tax on capital to disincentivize hoarding... I guess that tax is not high enough.

When the regulators have time to get around to sifting through remains; I would like them to investigate these two questions: why are corporations not investing their excess cash appropriates? why do corporations have so much excess cash, why cant corporations raise the cash they need in an efficient manner? 

[kp777]

By Zachary Warmbrodt

Politico

06/01/2023

Sen. Elizabeth Warren’s push to hit the executives of failed banks with sharper penalties is getting a big boost from an unexpected conservative partner — Sen. J.D. Vance.

Warren on Thursday unveiled Congress’s most politically viable response yet to the economy-shaking collapse of Silicon Valley Bank, with a bill backed by 12 other senators that would require the government to claw back executive compensation at large failed banks in a bid to deter excessive risk-taking.

Warren, a Massachusetts Democrat, and Vance, an Ohio Republican, worked hand-in-hand to craft the latest iteration of the bill and assemble key co-sponsors — among them nearly half the lawmakers on the Senate panel responsible for potentially voting on the legislation.

“This is not just for show,” Warren said in an interview. “We actually want to make change, and we’ve got a bill where we can get this done.”

The compromise indicates that a thirst for banking industry accountability — one shared by President Joe Biden — persists on Capitol Hill nearly three months after the failure of SVB and other regional lenders. Warren’s coalition is evidence that there may be sufficient political will to change policy.

[....]

Warren’s bill would require the FDIC to claw back from the executives of large banks compensation that they received over the three years preceding their institution’s failure or FDIC resolution. The measure would cover banks with $10 billion or more in assets — carving out the smallest “community” banks — and apply to directors, officers, controlling shareholders and other high-level individuals involved in decision-making.

Read more.

[parttimereporter]

So you say still nothing to see here? 

[lenbryant]

What happens when you deregulate your friends in high places? Things get broken. Banks go broke. Trump and his friends in Congress eased the Dodd-Frank rules in 2018, making it possible for the banks to go under. Screw the little guys.

[equityshala]

Failure of the First Republic Bank

The First Republic Bank was established in the early 1990s, Headquartered in San Francisco, California, but unfortunately, its life would be short-lived. By the mid-90s, the bank had already failed due to a number of issues. Primarily, the bank relied heavily on high-interest-rate loans, which meant that they were unable to tap into more profitable niches. As a result, the bank was unable to keep…

[liberty1776]

SVB Bailout

[attud-com]

Silicon Valley Bank Fully Exits One 97 Communications, No Current Investments Due to Financial Irregularities

Silicon Valley Bank has fully exited One 97 Communications and has no current investments due to financial irregularities. Read more about the bank's collapse and impact. #PatTm #BankNifty #Nifty50 #OptionTrading

According to a recent news report, Silicon Valley Bank has closed its operations due to financial irregularities. Vijay Shekhar Sharma, the chief of fintech major One 97 Communications, clarified on Twitter that the bank has fully exited his company and has no current investments. He added that SVB made a total investment of $1.7 million and exited with handsome returns after selling to other…

[dailybizworld]

FTX US And Four Other Firms Aren't Insured, FDIC Says

Five organizations, including cryptographic money trade FTX US, have been presented with an order to shut everything down by the Federal Deposit Insurance Corporation (FDIC). The letters have been sent over issues connected with "bogus and deceiving articulations" in regards to the organizations being guaranteed by the FDIC. The organizations that have been sent these letters. Read more

[copperbadge]

There’s a real Early Thirties vibe to all my banking apps lately trying to prevent a run by assuring us they haven’t had the Bad Touch of Silicon Valley Bank. I feel like I should be tuning into Franklin Roosevelt’s weekly Fireside Chat podcast. 

[ID: A screenshot of my donor-advised fund’s website, Charityvest; above the title “Sam’s Fund” is a little yellow banner reading “Our donor-advised assets are not custodied with Silicon Valley Bank, and we have no other direct exposure to SVB.”]

[mjz41-blog]

[imall4frogs]

“Just as there are no atheists in foxholes, there are no libertarians in financial panics.”

—Doyle McMannis for the Los Angeles Times