- 14 March 2023
The collapse of Silicon Valley Bank (SVB) marks the world’s largest bank failure since the 2008 financial crisis. On Friday, 10 March 2023 US authorities seized SVB’s assets after a run saw over $40bn in deposits pulled from the bank in one day alone; by 12 March, it was announced that US authorities had also taken over Signature Bank of New York, which was regarded as the financial institution most vulnerable to a bank run after SVB.
A classic liquidity crunch
Tech-focused SVB serviced a client-base of mostly cash-intensive tech firms, who needed ready access to capital as the fundraising environment became more difficult. The sector’s volatility contributed to a classic liquidity squeeze for the bank, as federal interest rates rose and customers affected by the economic climate withdrew more and more of their deposits. Astonishingly, the bank had no Chief Risk Officer for much of 2022, a fact which it quietly disclosed on 8 March 2023, some two months after the vacancy had finally been filled.
When it collapsed, the bank was in the process of attempting to raise capital to recover losses from the forced sale of bond assets whose yields had been affected by increasing interest rates. This resulted in concerned customers rushing to withdraw their remaining funds, fearful of limits to Federal Deposit Insurance Corporation guarantees that, at $250,000, were far below most deposit balances. The acceleration of the liquidity crunch occurred just as SVB had exhausted its stock of assets available for sale, and before it could raise new capital to plug the gap.
The US government reacted quickly to prevent contagion spreading to other institutions. It announced that all depositors in SVB and Signature could withdraw their money on Monday, 13 March using funds collected from fees that regulators charge to banks. In addition, regulators also announced a new way to give banks access to their emergency funds – the Bank Term Funding Program, which makes it easier for banks to borrow in a crisis.
History repeats for ratings agencies
Right up until the day its assets were seized, SVB was assessed as having investment-grade credit risk by both S&P (BBB) and Moody’s (A3). On 10 March, S&P downgraded SVB to D, and Moody’s likewise slashed SBV's ratings.
Ratings agencies were even slower to move when it came to Signature: it took until 13 March for Fitch to downgrade and then withdraw Signature's ratings, and it was 14 March before Moody’s downgraded Signature to junk status. Yet Thomas Murray’s own last assessment of Signature’s liquidity risk, based on information from its 2021 financial report, was the lowest possible rating of CCC.
The credit ratings agencies failed, once again, to foresee that both banks, in particular SVB, were running out of funds. This demonstrates that investors cannot rely solely on credit ratings agencies to monitor their exposure to banks.
The failure of these banks raises several issues worth reflecting on.
Edinburgh reforms on hold?
Because both SVB and Signature had less than US$250bn in assets, among other criteria, they were excluded from the Basel III capital adequacy requirements designed to ensure that banks have access to sufficient liquid assets to survive runs. President Trump signed a relaxation of post-2008 financial crisis regulations into law in 2018 as part of the Economic Growth, Regulatory Relief and Consumer Protection Act. These lower risk management requirements mean that most US banks are no longer required to disclose how much they hold in high-quality liquid assets to cover net cash outflows in periods of stress.
These latest failures may trigger additional regulatory demands on banks and financial institutions, with associated restrictions on their activity and increased burdens on their compliance teams. As part of the so-called Edinburgh reforms, regulators in the UK recently announced that they are considering relaxing the rules introduced following the 2008 financial crisis that forced banks to separate retail banking from riskier investment operations.
The aim is to increase the UK financial sector’s competitiveness following Brexit, but at the expense of reducing systemic protections. Perhaps lessons learned from the US will challenge the draft package of changes.
An increased risk environment
The measure announced by the US authorities to prevent contagion will protect depositors. However, shareholders and certain unsecured debtholders will not be protected.
Will these measures really be enough to prevent contagion, or will investors remain concerned with the financial and operational performance of other banks that could be susceptible to bank runs?
As with all moments of uncertainty, threat actors could exploit this crisis and the sense of urgency to launch cyber attacks on distracted organisations. Companies need to be prepared, and employees need to be reminded of the critical importance of vigilance and best practice.
Thomas Murray monitors in real time the financial, operational and cyber risk of thousands of organisations across more than a hundred markets, with the primary aim of improving asset safety for our global client base. Contact me, Ana Giraldo, or my colleague Derek Duggan, to discuss any of these issues in more depth.