Something Finally Broke: A Recap Of Banking Turmoil

Something finally broke.

After nearly 500 basis points of rate hikes in a year and balance sheet reduction by the Fed, a pocket of financial instability emerged. Where it arrived was perhaps a greater surprise for financial market participants.

The abrupt failure of Silicon Valley Bank (SVB) on March 10 and the ensuing takeover of Signature Bank (SBNY) on March 12 by state and federal regulators triggered a panic in financial markets that a broader run on the banking system might ensue in the coming days, particularly for small and mid-size depository institutions.

To calm these fears, the FDIC announced all deposits, including those higher than the $250,000 insurance limit, would be protected. The Federal Reserve also announced a new emergency funding facility, dubbed the Bank Term Funding Program, that would provide an additional source of liquidity to counter any systemic deposit outflows. Interest rate volatility surged to the highest levels since the 2007-2008 financial crisis as Treasury yields fluctuated in roller-coaster fashion on a daily basis.

Some of the focus in recent weeks — or the past year, for that matter — has been a significant increase in unrealized losses within depositories’ available-for-sale (AFS) investment portfolios. This has been well documented in both traditional and social media commentaries recently, and almost all of it has ignored the increase in the overall value of core depository liabilities over the same time. It would be difficult, if not impossible, for any depository institution to survive 25% of deposits walking out the door in a single day.

The difference for SVB — and SBNY, to a lesser extent — relative to the industry was the significant share of uninsured deposits. In other words, 25% of SVB’s deposits leaving came from a far fewer number of accounts than the typical depository, which leads us to the concept of deposit concentration. In a sound asset-liability management (ALM) framework, an institution with similar outflow risk would offset it by limiting interest-rate and liquidity risk in the securities portfolio and use interest-rate derivatives as needed. That didn’t happen at SVB. Just the top 10 depositors leaving would have accounted for more than $13 billion in cash.

Visit almfirst.com to read about the latest economic data and market trends. 

Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.