SVB Financial Group's sudden failure has surprised the banking industry after years of stability. The collapse, which occurred on Friday and is the largest bank failure since the 2008 financial crisis, had unique circumstances but raises questions about hidden weaknesses that could have consequences for customers and employees and potentially highlight issues in other banks.
Impact on Confidence, Regulation, and Investment
The failure of SVB could lead to a loss of confidence, tougher regulation, and investor skepticism about the financial health of smaller banks that were seen as adequately capitalized after regulators forced banks to hold more capital in the aftermath of the 2008 crisis. Sheila Bair, who headed the Federal Deposit Insurance Corp (FDIC) during the global financial crisis, said that bank watchdogs are likely now turning their attention to other banks that may have high amounts of uninsured deposits and unrealized losses. These two factors contributed to SVB's quick collapse.
Repercussions for Other Banks
"These banks that have large amounts of uninsured institutional money... that's going to be hot money that runs if there's a sign of trouble," Bair said. Investors and customers now face a nervous wait to see if SVB bank finds a buyer quickly. The speed of the SVB crash stunned markets and wiped out more than $100 billion in market value for U.S. banks in two days.
Limited Contagion Risk
Several experts said any ripple effects in the rest of the banking sector might be limited. Larger institutions have more diverse portfolios and deposit clientele than SVB did. SVB also had a high level of reliance on the startup sector. "We do not believe there is contagion risk for the rest of the banking sector," said David Trainer, CEO of New Constructs, an investment research firm. Jason Ware, chief investment officer for Albion Financial Group, said that linkages to the overall banking system are limited, but "this situation has perhaps implications for select regional banks with some direct exposure."
Tougher Rules Ahead
The failure of SVB could bolster efforts by U.S. regulators to tighten rules. The banking sector navigated the COVID-19 pandemic thanks partly to tougher rules following 2008; some were eased during President Donald Trump's administration. Some regulatory and industry sources said that easier rules for regional banks would likely come under greater scrutiny as watchdogs look to ensure they have enough cushion to weather similar stresses. One focus area could be larger regional banks, which saw some rule relief under the Trump administration. U.S. banking regulators said in October they were considering new requirements on large regional banks, including holding more long-term debt to weather losses.
Warnings from FDIC Chairman
On Monday, FDIC Chairman Martin Gruenberg warned bankers gathered in Washington that firms are facing higher levels of unrealized losses as rapid interest rate increases have driven down the value of longer-term securities. "The good news about this issue is that banks generally have strong financial conditions... On the other hand, unrealized losses weaken a bank's future ability to meet unexpected liquidity needs," said Gruenberg, three days before SVB announced its need to raise funds.