Banks are teetering as customers yank their deposits. Markets are seesawing as investors scurry toward safety. Regulators are scrambling after years of complacency.
Fifteen years ago, the world careened into a devastating financial crisis, precipitated by the collapse of the American housing market. Today, a different culprit is stressing the financial system: rapidly rising interest rates.
The sudden collapses of Silicon Valley Bank and Signature Bank — the biggest bank failures since the Great Recession — have put the precariousness of lenders in stark relief. First Republic Bank was forced to seek a lifeline this week, receiving tens of billions of dollars from other banks. And fears about the stability of the banking system hit Credit Suisse, the battered European giant.
But the storm had been quietly building for months.
The shakiness of some banks can be traced to how they fundamentally work.
The simplest way to think about a bank is that it takes deposits from customers and lends those funds to people who want to buy a house or to companies hoping to build a factory. The reality, though, is more complicated.
A diagram of a hypothetical bank that experiences a bank run.
A hypothetical bank . . .
Receives $2 billion in
deposits from its customers.
It then invests that money:
$1 billion in loans it gives
out; $1 billion in bonds.
When interest
rates rise,
newer bonds
pay out more.
Older bonds are less attractive
to buyers and become worth less:
The bonds the bank has are now
worth $500 million.
The bank now has only $1.5 billion in
assets — far less than what was
originally deposited. If enough customers
ask for their money back, the bank may
not be able return all the funds.
The more people notice this, the
more they demand their money
back, creating a run on the bank.
That is what happened with Silicon Valley Bank, which regulators seized on March 10 and which investors immediately viewed as a possible harbinger of similar trouble at other banks.
The problem for SVB was that it held many bonds that were bought back when interest rates were low. Over the past year, the Federal Reserve has raised interest rates eight times to combat the highest inflation in generations. As rates went up, newer versions of bonds became more valuable to investors than those SVB was holding.
With the tech industry cooling, some of SVB’s customers began withdrawing their money. To come up with the cash to repay depositors, SVB sold $21 billion of bonds. The bank racked up nearly $2 billion in losses.
Those losses set off alarms with investors and some of the bank’s customers. If the rest of SVB’s balance sheet was riddled with similar money-losing assets, would the bank be able to come up with enough money to repay its depositors?
Rather than wait around to find out, customers rushed to withdraw their funds – tens of billions of dollars.
A classic bank run was underway.
“With the Fed undertaking the most aggressive monetary tightening over the past 40 years, it seemed a matter of time until something broke,” analysts at Macquarie Securities wrote on Friday.
Even before SVB capsized, investors were racing to figure out which other banks might be susceptible to similar spirals. One bright red flag: large losses in a bank’s bond portfolios. These are known as unrealized losses — they turn into real losses only if the banks have to sell the assets.
Since the Fed began raising interest rates, banks have faced growing unrealized losses.
These unrealized losses are especially notable as a percentage of a bank’s deposits — a crucial metric, since more losses mean a greater chance of a bank struggling to repay its customers.
Unrealized gains and losses
on each bank’s investment securities as a share of its deposits
A series of bar charts showing the unrealized gains and losses on investment securities as a share of deposits for six mid-size banks from 2019 to 2022: First Republic, Pacific Western, Signature, Silicon Valley, Western Alliance and Zions. In each quarter of 2022, all banks had unrealized losses.
Source: Federal Financial Institutions Examination Council
Note: Includes both “held-to-maturity” and “available-for-sale” securities, meaning both long- and short-term investments.
At the end of last year U.S. banks were facing more than $600 billion of unrealized losses because of rising rates, federal regulators estimated.
Those losses had the potential to chew through more than one-third of banks’ so-called capital buffers, which are meant to protect depositors from losses, according to Fitch Ratings. The thinner a bank’s capital buffers, the greater its customers’ risk of losing money and the more likely investors and customers are to flee.
But the $600 billion figure, which accounted for a limited set of a bank’s assets, might understate the severity of the industry’s potential losses. This week alone, two separate groups of academics released papers estimating that banks were facing at least $1.7 trillion in potential losses.
The most skittish bank customers tend to be those whose deposits are uninsured.
This was a huge problem at SVB, where more than 90 percent of the deposits exceeded the amounts covered under federal insurance. The Federal Deposit Insurance Corporation insures deposits for individual accounts up to $250,000, and many other banks also have elevated levels.
Top 50 banks by share of deposits that are not insured by the F.D.I.C.
Excludes banking giants considered systemically important
A bar chart showing the share of deposits that were not federally insured at 50 U.S. banks as of the end of last year. At both Silicon Valley Bank and Signature Bank, more than 90 percent of deposits were uninsured.
Greater share of deposits uninsured
94% of $161 billion total deposits
Greater share of deposits uninsured
94% of $161 billion total deposits
Sources: Federal Financial Institutions Examination Council; Financial Stability Board
Notes: Data is as of Dec. 31, 2022. Includes domestic deposits only. Excludes global systemically important banks, which are subject to more stringent regulations, including tougher capital requirements.
To make matters worse, many banks — especially those with $50 billion to $250 billion in assets — kept less than 4 percent of their assets in the form of cash, according to Fitch.
Banks with less cash on hand may be more likely to bear losses if there is a rush of withdrawals.
Six bar charts showing the total amount of cash and noncash assets held by midsize banks from 2019 to 2022: First Republic, Pacific Western, Signature, Silicon Valley, Western Alliance and Zions. Even as their assets have climbed, these banks have held only a small share in cash.
Banks’ cash and noncash assets
Banks’ cash and noncash assets
Source: Federal Financial Institutions Examination Council
Midsize banks like SVB do not have the same regulatory oversight as the nation’s biggest banks, who, among other provisions, are subject to tougher requirements to have a certain amount of reserves in moments of crisis.
But no bank is completely immune to a run.
“I don’t think anybody’s built to withstand 25 percent of their deposits leaving in a day, which is what happened” in the case of SVB, said Nathan Stovall, a banking analyst at S&P Global Market Intelligence.
The Federal Reserve and other regulators are rushing to reassure everyone. Last weekend, the Fed announced a program that offers loans of up to one year to banks using the banks’ government bonds and certain other assets as collateral.
Crucially, the Fed said it would value the bonds at their original value — not at the lower levels that banks stood to receive if they tried to quickly sell them in the markets. The Fed’s goal was to send a reassuring signal that banks would not have to transform unrealized, potential losses into crippling actual ones.
At least so far, that program hasn’t been much of a game changer. Banks borrowed only about $12 billion — a small fraction of the deposits that were pulled out of SVB alone before its implosion.
But banks gobbled up a whopping $153 billion in loans through the Fed’s traditional lending program. That was up from less than $5 billion a week earlier and was the largest amount borrowed in a week since the 2008 financial crisis.
The fright that began with SVB has continued to spread to other banks.
On Wednesday, the Swiss authorities vowed to protect the giant bank Credit Suisse as concerns about its stability swirled. The next day, the U.S. authorities helped organize an industry bailout of First Republic — one of the large banks that had attracted particular attention from nervous investors.
The troubles lurking in the balance sheets of small banks could have a large effect on the economy. The banks could change their lending standards in order to shore up their finances, making it harder for a person to take out a mortgage or a business to get a loan to expand.
Analysts at Goldman believe that this will have the same impact as a Fed interest rate increase of up to half a point. Economists have been debating whether the Fed should stop raising rates because of the financial turmoil, and futures markets suggest that many traders believe it could begin cutting rates before the end of the year.
On Friday, investors continued to pummel the shares of regional bank stocksSponsored Product. First Republic’s stock is down more than 80 percent for the year, and other regional banks like Pacific Western and Western Alliance have lost more than half their values.
Investors, in other words, are far from convinced that the crisis is over.
Banks are teetering as customers yank their deposits. Markets are seesawing as investors scurry toward safety. Regulators are scrambling after years of complacency.
Fifteen years ago, the world careened into a devastating financial crisis, precipitated by the collapse of the American housing market. Today, a different culprit is stressing the financial system: rapidly rising interest rates.
The sudden collapses of Silicon Valley Bank and Signature Bank — the biggest bank failures since the Great Recession — have put the precariousness of lenders in stark relief. First Republic Bank was forced to seek a lifeline this week, receiving tens of billions of dollars from other banks. And fears about the stability of the banking system hit Credit Suisse, the battered European giant.
But the storm had been quietly building for months.
The shakiness of some banks can be traced to how they fundamentally work.
The simplest way to think about a bank is that it takes deposits from customers and lends those funds to people who want to buy a house or to companies hoping to build a factory. The reality, though, is more complicated.
A diagram of a hypothetical bank that experiences a bank run.
A hypothetical bank . . .
Receives $2 billion in
deposits from its customers.
It then invests that money:
$1 billion in loans it gives
out; $1 billion in bonds.
When interest
rates rise,
newer bonds
pay out more.
Older bonds are less attractive
to buyers and become worth less:
The bonds the bank has are now
worth $500 million.
The bank now has only $1.5 billion in
assets — far less than what was
originally deposited. If enough customers
ask for their money back, the bank may
not be able return all the funds.
The more people notice this, the
more they demand their money
back, creating a run on the bank.
That is what happened with Silicon Valley Bank, which regulators seized on March 10 and which investors immediately viewed as a possible harbinger of similar trouble at other banks.
The problem for SVB was that it held many bonds that were bought back when interest rates were low. Over the past year, the Federal Reserve has raised interest rates eight times to combat the highest inflation in generations. As rates went up, newer versions of bonds became more valuable to investors than those SVB was holding.
With the tech industry cooling, some of SVB’s customers began withdrawing their money. To come up with the cash to repay depositors, SVB sold $21 billion of bonds. The bank racked up nearly $2 billion in losses.
Those losses set off alarms with investors and some of the bank’s customers. If the rest of SVB’s balance sheet was riddled with similar money-losing assets, would the bank be able to come up with enough money to repay its depositors?
Rather than wait around to find out, customers rushed to withdraw their funds – tens of billions of dollars.
A classic bank run was underway.
“With the Fed undertaking the most aggressive monetary tightening over the past 40 years, it seemed a matter of time until something broke,” analysts at Macquarie Securities wrote on Friday.
Even before SVB capsized, investors were racing to figure out which other banks might be susceptible to similar spirals. One bright red flag: large losses in a bank’s bond portfolios. These are known as unrealized losses — they turn into real losses only if the banks have to sell the assets.
Since the Fed began raising interest rates, banks have faced growing unrealized losses.
These unrealized losses are especially notable as a percentage of a bank’s deposits — a crucial metric, since more losses mean a greater chance of a bank struggling to repay its customers.
Unrealized gains and losses
on each bank’s investment securities as a share of its deposits
A series of bar charts showing the unrealized gains and losses on investment securities as a share of deposits for six mid-size banks from 2019 to 2022: First Republic, Pacific Western, Signature, Silicon Valley, Western Alliance and Zions. In each quarter of 2022, all banks had unrealized losses.
Source: Federal Financial Institutions Examination Council
Note: Includes both “held-to-maturity” and “available-for-sale” securities, meaning both long- and short-term investments.
At the end of last year U.S. banks were facing more than $600 billion of unrealized losses because of rising rates, federal regulators estimated.
Those losses had the potential to chew through more than one-third of banks’ so-called capital buffers, which are meant to protect depositors from losses, according to Fitch Ratings. The thinner a bank’s capital buffers, the greater its customers’ risk of losing money and the more likely investors and customers are to flee.
But the $600 billion figure, which accounted for a limited set of a bank’s assets, might understate the severity of the industry’s potential losses. This week alone, two separate groups of academics released papers estimating that banks were facing at least $1.7 trillion in potential losses.
The most skittish bank customers tend to be those whose deposits are uninsured.
This was a huge problem at SVB, where more than 90 percent of the deposits exceeded the amounts covered under federal insurance. The Federal Deposit Insurance Corporation insures deposits for individual accounts up to $250,000, and many other banks also have elevated levels.
Top 50 banks by share of deposits that are not insured by the F.D.I.C.
Excludes banking giants considered systemically important
A bar chart showing the share of deposits that were not federally insured at 50 U.S. banks as of the end of last year. At both Silicon Valley Bank and Signature Bank, more than 90 percent of deposits were uninsured.
Greater share of deposits uninsured
94% of $161 billion total deposits
Greater share of deposits uninsured
94% of $161 billion total deposits
Sources: Federal Financial Institutions Examination Council; Financial Stability Board
Notes: Data is as of Dec. 31, 2022. Includes domestic deposits only. Excludes global systemically important banks, which are subject to more stringent regulations, including tougher capital requirements.
To make matters worse, many banks — especially those with $50 billion to $250 billion in assets — kept less than 4 percent of their assets in the form of cash, according to Fitch.
Banks with less cash on hand may be more likely to bear losses if there is a rush of withdrawals.
Six bar charts showing the total amount of cash and noncash assets held by midsize banks from 2019 to 2022: First Republic, Pacific Western, Signature, Silicon Valley, Western Alliance and Zions. Even as their assets have climbed, these banks have held only a small share in cash.
Banks’ cash and noncash assets
Banks’ cash and noncash assets
Source: Federal Financial Institutions Examination Council
Midsize banks like SVB do not have the same regulatory oversight as the nation’s biggest banks, who, among other provisions, are subject to tougher requirements to have a certain amount of reserves in moments of crisis.
But no bank is completely immune to a run.
“I don’t think anybody’s built to withstand 25 percent of their deposits leaving in a day, which is what happened” in the case of SVB, said Nathan Stovall, a banking analyst at S&P Global Market Intelligence.
The Federal Reserve and other regulators are rushing to reassure everyone. Last weekend, the Fed announced a program that offers loans of up to one year to banks using the banks’ government bonds and certain other assets as collateral.
Crucially, the Fed said it would value the bonds at their original value — not at the lower levels that banks stood to receive if they tried to quickly sell them in the markets. The Fed’s goal was to send a reassuring signal that banks would not have to transform unrealized, potential losses into crippling actual ones.
At least so far, that program hasn’t been much of a game changer. Banks borrowed only about $12 billion — a small fraction of the deposits that were pulled out of SVB alone before its implosion.
But banks gobbled up a whopping $153 billion in loans through the Fed’s traditional lending program. That was up from less than $5 billion a week earlier and was the largest amount borrowed in a week since the 2008 financial crisis.
The fright that began with SVB has continued to spread to other banks.
On Wednesday, the Swiss authorities vowed to protect the giant bank Credit Suisse as concerns about its stability swirled. The next day, the U.S. authorities helped organize an industry bailout of First Republic — one of the large banks that had attracted particular attention from nervous investors.
The troubles lurking in the balance sheets of small banks could have a large effect on the economy. The banks could change their lending standards in order to shore up their finances, making it harder for a person to take out a mortgage or a business to get a loan to expand.
Analysts at Goldman believe that this will have the same impact as a Fed interest rate increase of up to half a point. Economists have been debating whether the Fed should stop raising rates because of the financial turmoil, and futures markets suggest that many traders believe it could begin cutting rates before the end of the year.
On Friday, investors continued to pummel the shares of regional bank stocksSponsored Product. First Republic’s stock is down more than 80 percent for the year, and other regional banks like Pacific Western and Western Alliance have lost more than half their values.
Investors, in other words, are far from convinced that the crisis is over.
