Too Regional to Fail? A 2023 Tale

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It has been a wild five days since Silicon Valley Bank was shut down. By the time I am publishing this article, there have been millions of words written about the failure of Silicon Valley Bank, why it failed, what controls it did or did not have, etc. Rather than focus on that, I would rather focus on the government’s actions post takeover, the timing, and everything in between.

Swift Action by the FDIC

The FDIC showed that it would act swiftly to ensure a systemic failure of our banking systems did not occur. Within 48 hours, we went from a bank that a few days before was awarded one of the best banks in the United states, to being taken over by the FDIC. Heading into the weekend, both depositors and the world were uncertain what would happen to the deposits of some of the “who’s who” in the tech industries spotlight.  Roku, for instance, had $487 million on deposit with Silicon Valley Bank. 

Regional Banks Propped Up By the US Government

To stem a complete fallout in confidence with regional banks, the U.S. Government did what it has not done since the Great Recession: ensure that every dollar of depositors’ money is returned to the depositors.  While there is definitely not any sympathy for the bank’s shareholders, the Government backstopped the deposits in the bank. 

Before you see this as altruism, the selfish motivation was to stop a landslide run on all of the regional banks.  The FDIC and the government knew that if it did not act by beginning of the markets on Monday, the trickle of depositors demanding money would have become a landslide. Since the FDIC couldn’t find a buyer before the weekend was out, they made the astonishing announcement of ensuring no losses of the depositors’ money would occur.  This effectively has the public relying on the FDIC to insure any losses of these regional banks who didn’t have proper risk controls in place.

So, then everything is okay, right?  However, even as I write this article, regional bank stocks are getting slammed in the market. 

Where Do We Go From Here?

The Feds had to act to prevent a collapse of the regional banking system.  Make no mistake that even though this wasn’t a systemic issue, the drag from several regional banks’ collapses would have meant an instant recession and a shockwave through the confidence of the US banking system.  This is both the FDIC and the DFPI trying to save face where its many controls and audits didn’t pick up on the systemic risks piling up at SVB and other banks, as well as other state agencies when FDIC shut down Signature Bank on Sunday.

However, on Thursday we have the Feds’ FOMC meeting with the real possibility or raising rates.  Prior to the banks’ failures, I would have said we would have had a 50-bps raise.  Sitting here today, we could see anywhere from 0 to 50bps rate raise.

The real question on everyone’s lips: is this the beginning?

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