Bank runs may be associated with the Great Depression — but they’re not quite a thing of the past yet. Silicon Valley Bank depositors learned that the hard way last weekend.
This week, many investors are wondering how the crisis might play out — and whether they should avoid bank stocks going forward.
What caused the Silicon Valley Bank run?
The Silicon Valley Bank collapse was the result of two different pressures. The first was a decrease in the market value of the bank’s bond portfolio due to rising interest rates, which tends to push down bond prices.
The second was an increase in the rate of withdrawals among the bank’s tech-sector clients due to a slowdown in that sector.
Last week, the bank attempted to raise more capital by selling its own stock, sparking fears about its ability to cover withdrawals.
Kenny Polcari, the CEO of Kace Capital Advisors, says that Silicon Valley Bank’s situation became dangerous when depositors, many of whom are tech venture capitalists, began to pull their money out rapidly.
That spike in withdrawals forced the bank to sell large portions of its struggling bond portfolio at a loss, which amplified concerns about the bank’s cash crunch, which in turn caused even more panic-withdrawals.
Around midday Friday, the Federal Deposit Insurance Corp. determined that Silicon Valley Bank’s situation was unsalvageable and seized the bank.
The Treasury, Federal Reserve and FDIC then released a statement Sunday in which they pledged to make all depositors whole. (Disclosure: NerdWallet was an SVB customer before its closure.)
Polcari says that Silicon Valley Bank’s investment strategy was mismatched with its depositors — venture capitalists and startups who make frequent withdrawals.
“SVB made a mistake because they committed this money to a long-term bond portfolio, which would have been fine, had they never had to sell it. But once they came under pressure, they were forced to sell it and it led to this whole spiral effect,” he says.
Are more banks at risk of bank runs?
The rout in bank stocks has already spread far beyond the banks directly affected by last weekend’s run.
Trading was halted for more than a dozen regional bank stocks Monday, because the price of some stocks, such as First Republic Bank and Western Alliance Bancorporation, had fallen more than 45% in a matter of hours.
So are more banks at risk? Polcari says it depends on what kind of bank you’re talking about.
“The ‘money center’ banks — the JP Morgan Chases, the Citibanks, the Wells Fargos — they’re not exposed in the way that Silicon Valley Bank was,” he says.
Michael Bright, the CEO of the Structured Finance Association, says that many other banks currently have unrealized losses in their bond portfolios due to rising interest rates.
But he says Silicon Valley Bank was unique in that most of its depositors were businesses, and most of its deposits were bigger than the FDIC’s $250,000 coverage limit.
“They were institutions and companies that are presumably pretty savvy and as soon as they got any wind that their deposits may be at risk, they started pulling them, and pulled them in a hurry, and talked to each other,” Bright says.
Bright and Polcari both say that Silicon Valley Bank should be an isolated case — if everyone stays calm.
“Most of the other small regional banks are not concentrated in one industry, so chances are they’re not going to have the same problems that SVB had,” Polcari says.
How will the authorities respond going forward?
Polcari is cautiously optimistic that further bank runs aren’t likely because the government — by promising to give Silicon Valley Bank depositors their money back — “basically came out and backstopped every depositor in the country.”
“They basically said depositors are sacrosanct,” Polcari says. “So therefore I think they took a lot of the risk off the table.”
Bright says that the government’s communications strategy could have a big impact on how the banking crisis plays out from here.
“I think every American watching 'PBS NewsHour' tonight, or watching the local news, or reading the papers tomorrow morning, needs to see a drumbeat of respected folks saying, ‘your deposits are safe,’” Bright says.
Some investment analysts — such as the Goldman Sachs team — have said that they no longer expect the Federal Reserve to raise interest rates after its meeting next week. However, Polcari and Bright are both skeptical that the Fed would reverse course on its inflation-fighting program so quickly.
“We can walk and chew gum — we can fight inflation while preventing a bank run. I think it’s actually incumbent upon the Fed to be able to do both things,” Bright says.
Polcari says that a 50-basis-point increase, or a 0.5% increase, is “absolutely off the table” after the events of last weekend. However, he says that a 25-basis-point increase is “very much a possibility” if the upcoming consumer price index report continues to show high inflation.
What does this mean for bank stocks going forward?
Polcari says that some bank stocks could be risky for a while, as a result of last weekend’s events — but others could be investment-worthy.
Polcari says the current sell-off is a "buy opportunity" for big banks. He also says that some of the small banks that have come under pressure as a result of the Silicon Valley Bank run look like “screaming buys.”
“In the chaos, there is opportunity,” Polcari says.
But it will take a few more days to gauge the full extent of that chaos — and that opportunity.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.