Silicon Valley Bank Failed One Year Ago. Is the Regional Banking Crisis Really Over?

Regional banks are still struggling, with profits falling and stock prices volatile.

Silicon Valley Bank (SIVBQ)" width="921" height="641" data-caption='People queue up outside the headquarters of Silicon Valley Bank to withdraw their funds on March 13, 2023 in Santa Clara, Calif. <span class="lazyload media-credit">Liu Guanguan/China News Service/VCG via Getty Images</span>'>

Exactly one year ago, Silicon Valley Bank witnessed the most rapid bank run in history, with $42 billion in deposits draining away within a mere 10-hour span, equivalent to $1 million per second. This unprecedented outflow led to its official collapse on March 10, 2023, making it the second largest bank failure in U.S. history at the time. Only two days later, Signature Bank (SBNY) failed. And two months later, a third regional bank, First Republic Bank, went down the same path.

After a series of government intervention and restructuring, SVB today continues serving clients as a subsidiary of First Citizens Bank, which acquired SVB’s deposits and loans, including $72 billion in assets, at a deep discount of $16.5 billion less than three weeks after its collapse.

Where is SVB and its employees now? 

Many members of SVB’s commercial banking team continue their work at First Citizens, as per LinkedIn. Many of SVB’s investment banking leaders, which provided coverage to high-tech companies, have moved to Moelis & Co and HSBC. Others have bought their expertise to Stifel, Mitsubishi UFG, JPMorgan Chase (JPM) and other competitors, according to a Pitchbook investigation. There is little public information about where former SVB CEO Gregory Becker, CFO Daniel Beck and chief risk officer Kim Olson are now. All three resigned shortly after last year’s crisis.

In the first quarter of 2023, mid-sized banks in the $10 billion to $100 billion asset range saw a noticeable decrease in total deposits, amounting to a 1.9 percent decline. This decline escalated in March 2023 following the SVB bank run but had stabilized by January this year.

Still, large regional banks are struggling: the top six experienced a 15 percent to 38 percent drop in year-over-year profits from 2022 to 2023. Last week, New York Community Bancorp (NYCB) saw its stock price plunge 26 percent to its lowest level since 1997 after the bank revealed that its leadership found “material weaknesses” in internal risk assessments for its loan books. Regional bank stocks remain volatile compared to other types of financial institutions, indicating investors’ lingering worries about the sector.

Benefiting from the crisis were big players, like JPMorgan Chase. After acquiring First Republic’s $212.6 billion in loans and $92.4 billion in deposits for just over $10 billion in May 2023, JPMorgan saw a 67 percent year-over-year growth in profits that quarter. Overall, larger commercial banks saw inflows as customers sought safer institutions to hold their money.

Lessons learned from the crisis?

In an autopsy of the crisis, a white paper published by NYU Stern School of Business, authored by leading banking experts, points out the causes to the regional banking crisis that remain in the system. For example, it reported that SVB and First Republic had the lowest capital ratios, a measure of how well a bank can meet its obligations, amongst regional banks when considering unrealized losses.

Because traditional GAAP accounting practices do not require banks to disclose their regulatory capital (the minimum amount of money a bank has to maintain as per its regulators) using its fair market value, banks can report far higher regulatory capital than they actually have. This is because GAAP allows banks to not disclose the mark-to-market value of securities held in hold-to-maturity or available-for-sale buckets.

“We would be far better off if they were required to mark-to-market for regulatory purposes,” NYU Stern professor Kim Schoenholtz, who co-authored the aforementioned white paper, told Observer. Schoenholtz, who served as Citigroup’s global chief economist from 1997 to 2005, added that regulators are required to engage in “prompt corrective action” for banks that fall beneath regulatory capital minimums, but since banks can circumvent reporting their falling under such thresholds, it can render the regulator useless in meaningfully helping such at-risk banks.

The response from regulators to the crisis introduced another long-term risk to the banking system: moral hazard, which describes when an entity is incentivized to take on more risk because it is partially absolved from the consequences. One of the triggers of SVB’s bank run was that 85 percent of its deposits were not FDIC-insured. To bring stability to the sector during the crisis, the FDIC promised to insure all the deposits, saving all of the bank’s clients from losing any money. However, this policy encourages future banks to engage in more risky behavior, since they know that policymakers will provide an unlimited backstop if the bank fails to meet its obligations. “We don’t know how the moral hazard will play out…We usually don’t see it until it happens,” Schoenholtz said.

As part of the banking industry’s de-regulation, banks like SVB and Signature were classified as not systematically important a few years ago, giving them increased flexibility with stress tests and capital ratios that larger banks have to abide by. Moving forward, Schoenholtz argues that “the best remedy will be stronger rules, like higher liquidity minimums, that make the system safe.”