The recent failures of Silicon Valley Bank and Signature Bank highlight the importance of analyzing internal deposit concentrations and capital levels, according to Iowa Superintendent of Banking Jeff Plagge.
Plagge, who discussed the impacts of the recent collapses April 27 during the Iowa Division of Banking’s Day with the Superintendent in West Des Moines. Experts attributed the March 10 collapse of Silicon Valley Bank to its overreliance on long-term Treasuries to provide higher investment returns from its excess of deposits during the pandemic. The portfolio incurred heavy losses as the Federal Reserve continued to raise interest rates to battle high inflation. Customers withdrew $42 billion from the bank immediately before it failed, after investors issued warnings and the bank announced it had sold $21 billion of securities. Founded in 2001, the New York City-based Signature Bank had entered the crypto space in 2018, and by 2021 crypto deposits accounted for 30 percent of the bank’s total.
Plagge noted that bankers must assess their balance sheets and evaluate any reliance they have on wholesale funding sources. He noted that heavy deposit concentrations are not always bad but must be strongly managed. Plagge also advised banks to review their interest rate risk models to ensure they properly capture the impact of substantial interest rate movements; and consider the impact of those increases on borrower cash flows, collateral values and funding costs.
He expects the failures to also lead to scrutiny of contingency funding and crisis management plans, noting that regional banks could face more stringent stress testing requirements. Federal Reserve Vice Chair of Supervision Michael Barr indicated that more banks should undergo stringent stress testing in an April 28 report on the Fed’s supervision and regulation of SVB. He attributed the bank’s failure to “a textbook case of mismanagement by the bank.”
Barr discussed requiring banks with insufficient capital planning, liquidity risk management or governance and controls to face additional capital and liquidity requirements. He also discussed limiting capital distributions or incentive compensation in those cases.
Barr said the Fed also needs to reevaluate existing requirements for banks with at least $100 billion in assets, including possibly applying standardized liquidity requirements to a broader series of banks; evaluate how banks measure interest rate risks; and consider the stability of uninsured deposits and held-to-maturity securities in the Fed’s standardized liquidity rules and internal stress tests.
“We need to develop a culture that empowers supervisors to act in the face of uncertainty,” Barr added. “In the case of SVB, supervisors delayed action to gather more evidence even as weaknesses were clear and growing. This meant that supervisors did not force SVB to fix its problems, even as those problems worsened.”