A bank's bondholdings have to be carried at market value on its books if they are classified as "trading" or "available for sale." In 2022, SVB reclassified a chunk of its bonds as "held to maturity," where they didn't have to be carried at market value.
SVB had also availed itself of an option made available by the Fed in 2013 to not let losses on "available for sale" securities flow through to its regulatory capital level.
That SVB's capital, if marked to market, was lower than its reported capital mattered only if the bank had to sell bonds, such as to meet deposit redemptions.
Since the financial crisis, banks had steadily sought more funding from corporate and individual deposits, as opposed to tapping funds from financial markets, which were seen as more volatile and unreliable. A growing share of aggregate bank deposits was uninsured. Regulators had at times cited the potential risks associated with uninsured deposits, and were weighing asking banks to issue more long-term debt. But the issue wasn't high on their list of worries about the financial system.
Data included in the Fed's twice-yearly financial-stability report last November showed uninsured deposits had steadily risen as a share of financial system funding with the potential to leave quickly. Yet the report didn't cite this as a risk. Instead, it observed approvingly that big banks had tamped down their reliance on volatile financial markets for short-term funds.
Not only were roughly 90% of SVB's deposits uninsured, they were unusually concentrated in companies and people linked to technology and venture capital. Some deposits were in the hundreds of millions of dollars, or were kept in the bank as part of an agreement between a VC firm and SVB.
Ideally, when bank examiners pointed out problems, the bank's management would agree and voluntarily comply. But former examiners for the San Francisco Fed said that a bank might involve its lawyers if it didn't agree with the examiners' findings, treating the process as a court case rather than a routine oversight matter.
If examiners thought the bank should prepare for a scenario such as rapid growth, soaring interest rates and abrupt loss of deposits, as later happened to SVB, examiners would be hobbled by the absence of explicit regulatory guidance calling for such preparations, another examiner said. The bank could point out such a combination of events had never happened before and preparing for it would hurt shareholder returns, this former examiner said.
Signature Bank lacked SVB's bond exposure, but shared its dependence on uninsured deposits. Its regulators didn't raise this as an issue, according to former Rep. Barney Frank, co-sponsor of the Dodd-Frank law.
Regulators from the Federal Deposit Insurance Corp. and New York State Department of Financial Services met with Signature Bank's board on Feb. 15 and "didn't say anything about 'We're worried that your uninsured depositors are going to fly,'" said Mr. Frank, who was a director. "There was no alarm, no warning at that meeting that you guys are in trouble or this is a problem." Within weeks, a run on Signature's deposits prompted regulators to seize the bank.
The FDIC said its "examiners raised serious concerns in written and verbal communications, including less than satisfactory ratings for liquidity management, to Signature's management team at least five years before it experienced a liquidity crisis. Candid discussions with its Board about deficiencies in liquidity, deposit volatility, and corporate governance occurred as recently as February 15." The NYDFS declined to comment.
What none of the regulators or bankers anticipated was how fast depositors could flee, which appears to be a new reality in the age of smartphone apps and social media.
In past times, deposit outflows were modulated by how fast tellers could count out cash or ATMs could be refilled. Customers who wanted to close their accounts or move large sums had to visit their branch. That gave regulators and executives time to craft a plan to calm anxious customers. The newfound ability to move money with a smartphone eliminated that grace period..
FDIC officials are discussing how to manage public confidence as social media expands people's ability to "electronically panic," a person familiar with the talks said.
"The speed of the run...is very different from what we've seen in the past," Mr. Powell said Wednesday. "And it does kind of suggest that there's a need for possible regulatory and supervisory changes, just because supervision and regulation need to keep up with what's happening in the world."
--Rebecca Ballhaus, Ben Eisen, Jon Hilsenrath and Gregory Zuckerman contributed to this article.
Write to Andrew Ackerman at andrew.ackerman@wsj.com, Angel Au-Yeung at angel.au-yeung@wsj.com and Hannah Miao at hannah.miao@wsj.com.
(END) Dow Jones Newswires
March 24, 2023 12:48 ET (16:48 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
Comments