SIOUX FALLS, S.D. (KELO) — The collapse of the Silicon Valley Bank in California made it one of the largest bank failures in U.S. history.
It shows that even big banks are vulnerable.
“This is in some ways very classic, almost surprisingly so, in that the vulnerability here is fundamental to banking,” said Dr. Joseph Santos, the director of Director of the Ness School of School of Management Economics at South Dakota State University.
Banks function on the ability to borrow on the short term from depositors to make loans for the long term, Santos said.
SVB also invested in termed Federal Treasury notes, which are typically “a super safe” investment because the treasury is not going to default on paying those notes, he said.
But the federal treasury has been raising interest rates and that became a pitfall for the SVB, say Santos and Matt Paulson of Sioux Falls, an entrepreneur who works with start-ups, community investment and others.
The two men commented on SVB for which they had more knowledge than the collapse of Signature Bank in New York.
“It’s fine as long as long they hold them to maturity,” Paulson said of (long-term) treasury bonds. “The value goes up and down; you are not really impacted by that. But if you are forced to sell them before maturity date, you could get less value.”
If you buy at 3% and the interest rate goes up 5%, the treasury goes down in value if you are forced to sell.
Santos said it may be easy for him to say in Brookings that SVB management should have been more aware of its risks. It needed more discrepancy in terms of the maturity of its debts and maturity of its assets “to make sure you don’t get squeezed. They were a little less on guard then what you’d like to see,” Santos said.
The heavy investment in federal treasuries at this point along with many depositors who had more money in the bank than the $250,00 FDIC insured maximum made the bank even more vulnerable, Santos said.
SVB had recently reported that it took a $1.8 billion loss as it sold some bonds and securities to help offset a drop in stocks.
“Depositors got scared that the bank had taken too many losses by investing in long-term treasuries that declined in value,” Paulson said.
Depositors began “an old fashioned run” on the bank to withdraw their money, Paulson and Santos said.
Santos said it was a run but depositors wanted to withdraw money that was not insured, which makes the SVB situation slightly different from other banks.
Perception of the role SVB had with venture capitalists and the risk of start-ups also played a role in the uneasiness of depositors, Santos said.
“SVB did have kind of a reputation of making loans that were too generous to start-ups,” Paulson said. SVB wanted to be the popular start-up bank, “They had to take on more risk then they should have…,” Paulson said.
Paulson did have an account with SVB but that client also worked with another bank.
When SVB needed cash for depositors and to offset losses, the cash wasn’t all there.
“It’s a liquidity crisis,” Santos said. “The bank can’t get the liquidity it needs at the moment as opposed to a default.”
The collapse happened quickly.
“The bank was solvent on Wednesday and Thursday…,” Paulson said. By noon Friday, regulators stepped in.
The federal government took over SVB operations. It will guarantee all deposits, which includes those over the FDIC maximum insured rate of $250,000.
The federal government wanted to stop the “fire sale” of treasury bonds by providing a loan, Santos said.
“Rather then sell in fire sale, we will lend to you (money),” Santos said. The treasuries are used as collateral on the loan, he said.
The federal government’s action was appropriate, Santos and Paulson said.
“I suspect the contagion is contained,” Santos said of the situation.
“All the short-term chaos I think has subsided,” Paulson said. “I just think the long-term, underlying risks are there.” The long-term risk includes banks with heavy investment in long-term treasuries, he said.
Paulson said Monday morning the stock market did not appear to be responding negatively to the SVB and Signature situations. The stocks of some banks were down, he said.
Neither expect any local or regional banks to experience anything similar to the SVB incident.
Santos said SVB is a different type of bank then what is found in the Midwest. It would be unusual to find banks with so many depositors above $250,000, he said.
Banks that invest in manufacturing and other types of investment would also be less vulnerable to the SVB situation, Santos said.
Paulson said smaller, regional banks tend to be conservative with risk.
However, there are some banks that could collapse within the week or coming months, if they have similar characteristics to SVB, he said.