US bank busts: A brief history starting 2008, in 5 charts
4 min read 20 Mar 2023, 11:03 PM ISTThis month saw the collapse of two US banks: Silicon Valley Bank (SVB) and Signature Bank
PremiumThis month saw the collapse of two US banks: Silicon Valley Bank (SVB) and Signature Bank. SVB, which specialized in serving tech companies, was shut down by the US regulator after a run on its deposits triggered by losses in its securities portfolio. Signature Bank, which had many clients in the crypto space, faced a similar risk. While these closures were the result of specific decisions taken by these banks like over-dependence on securities for returns and a concentrated customer pool, among others, they raked up memories of the 2008 financial crisis and triggered concerns about the banking sector.
History of Failures
The US financial crisis of 2008 ripped through its banking system—and had a cascading effect on the world economy. Between 2008 and 2012, 465 American banks with $689 billion in assets shut down. In 2010, the Barack Obama administration passed the Dodd-Frank Act, which aimed to make the system safer for depositors and less onerous for taxpayers. Regulations tightened and banks designated as too big to fail were subjected to stress tests.
The number of US bank failures has consistently fallen since, with 2018, 2021 and 2022 registering no shutdowns. Even the size was small, with average assets of $333 million. In 2018, the Donald Trump administration eased some Dodd-Frank restrictions, after lobbying by banks, including by SVB. Signature and SVB had combined assets of $319 billion, close to the worst of the 2008 crisis. However, 2008 was defined by poor asset quality and high leverage, which is not the case today.
Deposit Surge
SVB is the largest bank failure since 2008, when Washington Mutual closed with deposits of $188 billion. JPMorgan Chase acquired Washington Mutual’s banking operations and its deposits. While Signature Bank ($89 billion in deposits) is smaller than SVB ($175 billion in deposits), it’s still larger than all banks that failed during the 2008 crisis barring Washington Mutual.
SVB’s deposits grew significantly through the pandemic: from $61.8 billion in 2019 to $189.2 billion by end of 2021. This racy growth was mainly due to venture capital funds and tech startups, which formed a bulk of its customers. Similarly, Signature Bank got a boost from the growth of crypto. Of its $89 billion deposits, $16.5 billion were from digital asset-related customers. For the US banking industry as a whole, deposits grew by 21.7% in 2020, 10.6% in 2021 and 5.4% in 2022, according to the US Federal Deposit Insurance Corporation.
Insurance Cover
SVB parked a lot of its deposits in long-term debt instruments, which were safe but were in the red due to a spate of interest rate hikes. As depositors panicked and rushed to pull out their deposits, selling these debt instruments would have meant taking a big loss. What heightened the panic was that 94% of SVB’s deposits and 89% of Signature Bank’s deposits were uninsured.
Among US banks with over $50 billion in assets, these were some of the highest proportion of estimated uninsured domestic deposits. Three other banks had an uninsured deposit component of above 80% and four had over 70%, according to S&P Global Market Intelligence data. However, it’s important to note that the other three banks in the 80% band had a much lower proportion of deposits parked in held-to-maturity securities than SVB (94.4%) or Signature (93.3%).
Prime Insecurity
SVB’s collapse accelerated when it announced that it lost $1.8 billion on selling $21 billion worth of its securities. The bank had a low loan-to-deposit ratio, because its customers, startups and VC firms, were flush with cash during much of the pandemic. SVB invested these funds in securities, whose value dropped when the US central bank started raising interest rates to tackle inflation. SVB was not the only bank to be impacted.
According to FDIC data, as of December 2022, US banks had unrealized losses of $620 billion on investment securities. It’s one of the reasons why there is a concern about the US banking sector, and rating agency Moody’s has changed its outlook on them to ‘negative’. It has also increased the pressure on the US accounting regulator to change accounting rules so that investors get a clearer picture. US banks had unrealized losses of $620 billion on investment securities, compared to unrealised gains of $119 billion as of the end of 2020.
Tech Pangs
When SVB announced its $1.8-billion loss, there were hopes it would manage. But when customers started withdrawing deposits in large numbers, its fate was sealed. Besides, the tech sector, private equity and venture capital in general were also feeling the heat from rising interest rates.
Till mid-2022, deal making was robust. “Then, in June, when US central bankers issued the first in a series of three-quarter-point interest rate hikes—and their colleagues around the world followed suit—banks pulled back from funding leveraged transactions and deal-making fell off a cliff, pulling exit and fund-raising totals down with it," Bain & Company said in its recent Global Private Equity Report. Now, all eyes are on the US government, in particular its central bank, to see if it manages the broader banking system.
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