Silvergate shutdown, SVB’s woes spark fears of banking crisis

While both lenders had unusually fickle bases of depositors, all banks are facing a challenge as rising rates leave them laden with low-interest bonds.

Silvergate Capital Corp.’s abrupt shutdown and SVB Financial Group’s hasty fundraising have sent U.S. bank stocks diving and tongues wagging across the industry: Could this be the start of a much bigger problem?

The issue at both of the once highflying California lenders was an unusually fickle base of depositors who yanked money quickly. But below that is a crack reaching across finance: Rising interest rates have left banks laden with low-interest bonds that can’t be sold in a hurry without losses. So if too many customers tap their deposits at once, it risks a vicious cycle.

Across the investing world, “people are asking who is the next one?” said Jens Nordvig, founder of market analytics and data intelligence companies Exante Data and Market Reader. “I am getting lots of questions about this from my clients.”

Indeed, amid deposit withdrawals at SVB, its chief executive urged customers Thursday to “stay calm.”

The immediate risk for many banks may not be existential, according to analysts, but it could still be painful. Rather than facing a major run on deposits, banks will be forced to compete harder for them by offering higher interest payments to savers. That would erode what banks earn on lending, slashing earnings.

Small and midsize banks, where funding is usually less diversified, may come under particular pressure, forcing them to sell more stock and dilute current investors.

‘TERRIBLE KICKING’

“Silicon Valley Bank is just the tip of the iceberg,” said Christopher Whalen, chairman of Whalen Global Advisors, a financial consulting firm.

“I’m not worried about the big guys but a lot of the small guys are going to take a terrible kicking,” he said. “Many of them will have to raise equity.”

Every bank in the S&P 500 Financials Index tracking major U.S. firms slumped on Thursday, taking the benchmark down 4.1% — its worst day since mid-2020. Santa Clara-based SVB tumbled 60%, while First Republic Bank in San Francisco fell 17%.

[More: 570 funds and ETFs had exposure to SVB, including ESG products]

Another S&P index tracking midsize financials dropped 4.7%. The worse performer there was Beverly Hills-based PacWest Bancorp, down 25%.

Ironically, many equity investors had piled into financial stocks to ride out the Federal Reserve’s interest-rate hikes, betting it would pave the way for lenders to earn more. For them, this week has been a shock.

“The cost of deposits rising is old news, we’ve seen that pressure,” said Chris Marinac, an analyst at Janney Montgomery Scott. But suddenly “the market has really focused on it because there’s an obvious surprise with the capital raise from Silicon Valley Bank.”

SVB announced the stock offering as its clients — firms backed by venture capital — withdrew deposits after burning through their funding. The lender liquidated substantially all of the securities available for sale in its portfolio and updated a forecast for the year to include a sharper decline in net interest income.

Hours after CEO Greg Becker urged clients to “stay calm” on a conference call Thursday, news broke that a number of prominent venture capital firms, including Peter Thiel’s Founders Fund, were advising portfolio companies to pull money as a precaution.

At Silvergate, the problem was a run on deposits that began last year, when clients — cryptocurrency ventures — withdrew cash to weather the collapse of the FTX digital-asset exchange. After losses from rapidly selling securities, the firm announced plans Wednesday to wind down operations and liquidate.

U.S. bank stocks also came under pressure this week after KeyCorp warned about the mounting pressure to reward savers. The regional lender lowered its forecast for growing net interest income in the current fiscal year to 1% to 4%, down from 6% to 9%, because of the “competitive pricing environment.” Its stock fell 7% on Thursday.

‘MORE INSULATED’

Regulators talk openly about spending less time policing the balance sheets of small banks, giving them room to innovate, with some dabbling in financial technology platforms or cryptocurrencies.

Authorities have instead devoted much of their time and attention since the 2008 financial crisis to ensuring the stability of large “systemically important” banks such as JPMorgan Chase & Co. and Bank of America Corp.

They’ve forced the biggest lenders to hold ever-larger amounts of capital aside — sometimes over the loud complaints of bankers — so that their health would be beyond reproach at moments like this. Smaller lenders by contrast have been handled with “a very light-touch approach,” Michael Barr, the Fed’s vice chair for supervision, said during a speech Thursday.

“There are obviously larger institutions that are also exposed to these risks too, but the exposure tends to be a very small part of their balance sheet,” he said. “So even if they experience the same deposit outflows, they are more insulated.”