In March, several large U.S. banks with exposure to cryptocurrencies and technology start-ups collapsed, including Silvergate Bank (SI), Silicon Valley Bank (SVB) and Signature Bank of New York (SBNY). These and other banks experienced a surge in deposits from a combination of pandemic-era stimulus and the rise in cryptocurrency interest and cash inflows to technology start-ups from a hot IPO market in 2020 and 2021. For example, SVB’s deposits nearly doubled in 2021 from the prior year. Banks used these new deposits to make investments, which typically have low credit risk or risk of default, but high-interest rate risk. This includes the risk of interest rates rising, such as Treasury bonds or government-guaranteed mortgage-backed securities (MBS). 

This year, reduced interest in cryptocurrencies and the limited ability for tech start-ups to raise new capital led to deposit withdrawals, meaning that some banks were forced to tap their investment portfolios. However, due to the rise in interest rates in 2022, they had to realize capital losses on investment sales in order to raise capital and meet redemptions. As these losses became public knowledge, depositors began to lose confidence in the bank, leading to an acceleration of withdrawals, which quickly spiraled into a classic “bank run” at Silvergate, Silicon Valley Bank and Signature Bank of New York. What made these three banks somewhat unique – and particularly vulnerable – was their exposure to the cryptocurrency and tech start-up markets, high proportion of uninsured deposits as a percentage of total deposits, and large losses in their investment securities holdings.

Concerns quickly spread to Europe, as investors and depositors began to lose confidence in Credit Suisse. While Credit Suisse did not necessarily share the risks of the three failed US banks, the Swiss bank has been struggling for several years with deposit outflows, lost business, a declining stock price and most recently, concerns about its financial reporting expressed by the Securities and Exchange Commission (SEC). Credit Suisse’s attempt to raise additional capital failed as its largest investor, The Saudi National Bank, declined to invest further in the bank. As a direct result, the Swiss government organized the United Bank of Switzerland (UBS) to acquire the company. 

Below is the chain of events that transpired from March 8 to March 19:

• March 8: SI, a heavily crypto-involved bank, voluntarily shut its doors after depositors removed $42 billion dollars in deposits in one day.
• March 10: SVB was taken over by the FDIC. Although the bank was in good financial condition per California state regulators, it became insolvent due to the run on deposits.
• March 12: SBNY was preemptively closed by state regulators for a "systemic risk exception.” The bank was in good financial condition but due to its highly publicized relationship to cryptocurrency - it had 15% of its deposits in crypto assets - regulators felt that its cryptocurrency exposure could lead to a run on the deposits of SBNY and decided to shut it down.
• March 19: The Swiss government organized an emergency rescue of Swiss banking giant Credit Suisse, allowing UBS to acquire the company for a very low share price. The Swiss government considered the action necessary to ensure financial stability.

Concerns have spread to other banks, including Deutsche Bank, First Republic (FRC) and Western Alliance Bank (WAL), among others.

In response, the U.S. Treasury, Federal Reserve, and private sector have taken steps to stem the tide of waning confidence in the U.S. banking system:

• The U.S. Treasury announced that all depositors of the three failed banks will be made completely whole, even above the $250,000 FDIC insurance limit. Though U.S. Treasury Secretary Janet Yellen stopped short of offering blanket protections for all deposits systemwide, she reiterated that the government stands ready to backstop more deposits if necessary to stop contagion.
• The Federal Reserve announced The Bank Term Funding Program (BTFP), an emergency lending program to provide liquidity to banks. This gives banks access to up to one-year loans at favorable terms, to avoid being forced to sell investments at a loss like Silvergate and Silicon Valley Bank. Through this new program and the existing discount window, banks accessed over $150 billion in liquidity in March.
• Eleven larger banks deposited $30 billion into First Republic Bank as a show of confidence in the company and the broad banking sector. Additionally, New York Community Bank acquired many of Signature Bank’s assets, First Citizens Bancshares acquired most of Silicon Valley Bank’s assets and UBS acquired Credit Suisse. 

For now, these actions have calmed fears and allowed some degree of normalcy to return to financial markets. If these parties can maintain confidence in the U.S. banking system, further bank failures can be avoided and normalcy in financial markets can continue. However, should further stress fall on the banking system, the speed and magnitude in which the U.S. Treasury, Federal Reserve and private sector respond will determine the degree of volatility financial markets experience.

Key takeaways:

• The banking events that occurred in March are likely to cause banks to focus on their own balance sheet health, rather than on expanding loan books, likely leading to tightening lending standards and less credit available to the broad economy. This may produce some downward pressure on economic growth in 2023.
• However, this may alleviate some of the inflation concerns that prompted the Federal Reserve to rapidly raise interest rates over the past 12 months, leading some economists to speculate that the Federal Reserve may be close to done raising its benchmark interest rate and possibly begin cutting rates by the end of the year.
• Over time, more regulations are likely to be put in place for banks, especially regional banks. We anticipate new regulations focusing on interest rate risk within the bank’s securities portfolios and may include changes to the accounting treatment of these holdings. Additionally, banks’ FDIC premiums, which are used to pay for deposit insurance coverage, are likely to increase. These potentially tighter regulations are likely to put regional banks at a disadvantage versus larger banks and raise the cost of doing business for most or all U.S. banks.

Not FDIC Insured. No Bank Guarantees. May Lose Value. Not a Deposit. Not Insured by Any Federal Government Agency.