Small banks vulnerable as deposits drop
As banks topple, who could be next?
It’s a question with serious consequences.
In the wake of the collapses of Silicon Valley Bank, Signature Bank and First Republic Bank, customers at some midsize regional banks have withdrawn money, potentially setting up those banks for similar scenarios as the failed banks, where they are forced to sell underwater assets for quick cash to satisfy their depositors.
“It’s fair to say that scores and possibly hundreds of banks are vulnerable in this way,” said Robert Hockett, a Cornell University professor of law and public finance. “As more and more banks get into trouble or fail, increasingly depositors in the remaining banks think, ‘Maybe I should move my money into the too-big-to-fail banks.’ We’ve had a massive drain from community and retail banks into the JPMorgan Chase-type banks.”
And it’s essentially a self-fulfilling prophecy. “The more that it happens, ironically, the more that it will have to happen,” Hockett said. “It’s a massive, slow-moving drain. You could almost call it a bank walk, rather than a bank run.”
Plenty of smaller banks reported an outflow of deposits in the first quarter, although only a few are in double-digits.
PacWest of Los Angeles, Western Alliance of Phoenix and Comerica of Dallas are the largest ones experiencing this phenomenon — but all are a fraction of the size of the three banks that have already failed, meaning their collapses wouldn’t be seismic events. Likewise, their quarter-overquarter deposits declines (16.9% at PacWest, 11.3% at Western Alliance and 9.4% at Comerica) fall short of the 40.8% decline that triggered First Republic’s collapse.)
Novato’s Bank of Marin is the only Bay Area bank among the 20 that are most affected, according to a list compiled by S&P Global Market Intelligence
based on earnings reports. But it is even smaller — it has less than one-fiftieth the assets of First Republic. Its deposits were down 9% compared with the prior quarter. Bank of Marin said it was unable to comment by deadline for this article’s publication.
All the turmoil has been good news for the “too-big-to-fail banks,” namely Chase, Bank of America, Wells Fargo and Citigroup, which are seen as a safe refuge.
Haydar Haba, managing partner at Andra Capital in San Francisco, said he’s told the startups backed by his VC fund to move their money.
“I’ve been saying, ‘You really cannot bank with medium-sized banks any more, you really need to bank with the too-big-to-fail banks, and any excess cash should go to Treasuries,’ ” he said. “The insurance deposit limits are way too low, and leave you too exposed to a run on the bank.”
Some movement is afoot to raise the Federal Deposit Insurance Corp. limit from $250,000. If accounts were fully insured, depositors would have no reason to flee when they’re worried about their bank’s health.
“The FDIC caps are too low to be helpful for business customers,” Hockett said.
Rep. Ro Khanna, D-Santa
Clara, is among lawmakers seeking this change.
“The SVB crisis revealed the urgent need to guarantee all bank deposits to prevent further consolidation in the banking industry and ensure that employees get paid on time,” he said in an emailed statement. “I’m working on a bipartisan proposal that will insure non-interestbearing transaction accounts without a cap by charging a progressive fee levied exclusively on holders of accounts above $250,000.”
Even if more banks fall, some experts say that may not be catastrophic, as the U.S. has thousands of banks, more per capita than many other nations.
“It’s still an open debate about how much of a problem it is” if a smaller bank is bought by a bigger one, said Anastassia Fedyk, an assistant professor of finance at the Haas School of Business at UC Berkeley. She expects to see more failures and consolidation, and doesn’t necessarily think that lawmakers need to intervene.
“A couple dozen banks of small size getting consolidated into large banks may not be something the government would be that concerned with,” she said.
There is still another shoe that might drop and imperil banks. It’s the looming catastrophe of commercial loans. Consider all those vacant office buildings in San Francisco and elsewhere. Residential lending is a concern as well. Already, Veritas, the largest landlord in San Francisco, is in default on loans for some of its 95 buildings in the city.
“There are a decent amount of banks with commercial real estate exposure,” said Craig Heryford, an attorney at San Francisco’s
Gordon Rees Scully Mansukhani. “That’s going to be a real driver in the next few years. The banks sweating the most are the ones with significant office space commercial exposure, and banks that made very low fixed-rate mortgage loans to private wealth customers to try to capture all their business.”