Bond yields fell sharply on Monday as investors bet that the failures of Silicon Valley Bank and Signature Bank would cause the Federal Reserve to raise borrowing costs more slowly as it battles inflation.
What’s happening
The yield on the 2-year Treasury TMUBMUSD02Y, 4.326%
tumbled 38 basis points to 4.213%. Yields move in the opposite direction to prices.
The yield on the 10-year Treasury TMUBMUSD10Y, 3.597%
retreated 16.3 basis points to 3.542%.
The yield on the 30-year Treasury TMUBMUSD30Y, 3.672%
fell 5.2 basis points to 3.658%.
What’s driving markets
The monetary policy-sensitive 2-year Treasury yield plunged at one stage early on Monday by more than 40 basis points as investors made bets that worries about the banking system in the wake of the collapse of SVB SIVB, -60.41%
and Signature Bank SBNY, -22.87%
would force the Federal Reserve to slow the pace of interest rate rises.
The 2-year yield, which just last Thursday was trading above 5%, a 15-year high, dropped below 4.2%.
Markets are pricing in a 95.2% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5.0% after its meeting on March 22nd, according to the CME FedWatch tool.
Just last week the chances of a 50 basis point hike were priced at 70%, and now they are zero.
The central bank is expected to take its Fed funds rate target to 4.93% by July 2023, according to 30-day Fed Funds futures. Several days ago the so-called terminal rate was expected to be above 5.6% in October.
The MOVE index, which measures expected volatility in the Treasury market, sits at 140, its highest in 2023 and up 40% since the start of February.
What are analysts saying
“The Fed may now find itself between a rock and a hard place. It wants to tighten policy to keep a lid on inflation but will now face questions as to whether policy is already too tight, given this nasty wobble in the banking system and the pressure higher rates are already putting on many companies’ cash flows,” said Russ Mould, AJ Bell investment director.
“If nothing else, this is a reminder that the Fed may not find it easy to extricate itself from more than a decade of record-low interest rates and $7 trillion of quantitative rasing (around a quarter of U.S. GDP) without something breaking somewhere. Money was cheap and tossed around with abandon as a result of the zero cost associated with it. Now markets are going through a journey once more to discover what is the cost of money, some of that prior reckless abandon could lead to trouble.”
“For all of the Fed’s efforts to tighten, the Fed Funds rate is still below where it was before the Great Financial Crisis started in 2007 and the central bank may yet struggle to get back there, if the SVB drama is anything like a reliable guide,” Mould concluded.
State authorities closed New York-based Signature Bank SBNY, -22.87%
on Sunday, after Silicon Valley Bank was shut down by regulators on Friday in the biggest bank failure since the 2008 financial crisis.
All depositors of Signature Bank will be made whole, according to a joint statement by the Department of the Treasury, Federal Reserve and FDIC.
Signature Bank has been popular among crypto companies, especially after crypto-friendly Silvergate Bank SI, -11.27%
said last Wednesday it would close its operations.
Signature Bank provides deposit services for its clients’ digital assets, but does not invest in, does not trade, does not hold on its own balance sheet nor provide custody of digital assets, and does not lend against or make loans collateralized by such assets, the company said.
The Federal Reserve on Sunday also announced a new emergency loan program to bolster the capacity of the banking system.
U.S. equity markets traded higher Sunday afternoon, with the Dow futures YM00, +1.00%
up 0.5%, and the S&P 500 ES00, +1.40%
futures up 0.8%. Futures for the Nasdaq 100 NQ00, +1.37%
rose 0.9%, according to FactSet data.
Major cryptocurrencies rallied Sunday. Bitcoin BTCUSD, +3.54%
surged 6.4% in the past 24 hours to around $21,842 and ether ETHUSD, +2.36%
gained 7% to $1,576, according to CoinDesk data.
U.S. financial regulators on Sunday said Silicon Valley Bank customers would have access to all their money on Monday, days after the bank failed.
Announcing new steps, the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation said their moves would “ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”
The FDIC will be able to complete its resolution of Silicon Valley Bank SIVB, -60.41%
“in a manner that fully protects all depositors,” a joint statement said. “Depositors will have access to all of their money starting Monday, March 13,” the statement added, and no losses will be borne by U.S. taxpayers.
“The American people and American businesses can have confidence that their bank deposits will be there when they need them,” President Joe Biden said in a statement Sunday night. “I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”
Signature Bank in New York was closed Sunday by its state regulator, the joint announcement said. “All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer,” said the joint statement.
Separately, the Fed said it would make additional funding available to banks to ensure they meet depositors’ needs through a new “Bank Term Funding Program.”
Under the new program, banks and other lenders will be able to pledge Treasurys and mortgage-backed securities for cash. Banks can pledge collateral at par.
This will eliminate the need for a bank to quickly sell its assets in times of stress.
The central bank said “it is prepared to address any liquidity pressures that may arise.”
In a separate statement Sunday, Securities and Exchange Commission Chair Gary Gensler said regulators are monitoring markets amid the recent turmoil. and promised to prosecute “any form of misconduct that might threaten investors, capital formation, or the markets more broadly.”
It’s all eyes on federal banking regulators as investors sift through the aftermath of last week’s market-rattling collapse of Silicon Valley Bank.
The name of the game — and the key to a near-term market bounce — could be a deal that makes depositors at Silicon Valley Bank, or SVB, whole, analysts said. And efforts by regulators appeared to be focused on soothing worries over the ability of companies to access uninsured deposits — most such deposits exceed the FDIC’s $250,000 cap — in order to prevent runs similar to the event that capsized SVB from occurring elsewhere.
“If a deal gets struck tonight that doesn’t haircut depositors, the market is going to rally strongly,” said Barry Knapp, managing partner and director of research at Ironsides Macroeconomics, in a phone interview Sunday afternoon.
Investors will also be assessing the fallout to see if it complicates the Federal Reserve’s plans to hike interest rates further and potentially faster than previously expected in its bid to tamp down inflation.
SVB was closed by California regulators on Friday and taken over by the Federal Deposit Insurance Corp., which was conducting an auction of the bank Sunday afternoon, according to news reports.
“We want to make sure that the troubles that exist at one bank don’t create contagion to others that are sound,” Treasury Secretary Janet Yellen said in a Sunday morning interview on “Face the Nation” on CBS, while ruling out a bailout that would rescue bondholders and shareholders of SVB parent SVB Financial Group SIVB.
“We are concerned about depositors and are focused on trying to meet their needs,” she said.
Continued uncertainty could leave a “sell first, ask questions later” dynamic in effect Monday.
“In what is an already jittery market, the emotional response to a failed bank reawakens our collective muscle memory of the GFC,” Art Hogan, chief market strategist at B. Riley Financial Wealth, told MarketWatch in an email, referring to the 2007-2009 financial crisis. “When the dust settles, we will likely find that SVB is not a ‘systematic’ issue.”
Knapp warned that market turmoil with significant potential downside for stocks could ensue if depositors are forced to take a haircut, likely sparking runs at other institutions. A deal that leaves depositors whole would lift the overall market and allow bank stocks, which got hammered last week, to “rip” higher “because they are cheap” and the banking system “as a whole…is in really good shape.”
Muscle memory, meanwhile, was in effect at the end of last week. Banking stocks dropped sharply Thursday, led by shares of regional institutions, and extended their losses Friday. The selloff in bank stocks pulled down the broader market, leaving the S&P 500 SPX, -1.45%
down 4.6%, nearly wiping out the large-cap benchmark’s early 2023 gains.
The Dow Jones Industrial Average DJIA, -1.07%
saw a 4.6% weekly fall, while the Nasdaq Composite COMP, -1.76%
declined 4.7%. Investors sold stocks but piled into safe-haven U.S. Treasurys, prompting a sharp retreat in yields, which move opposite to prices.
SVB’s failure is being blamed on a mismatch between assets and liabilities. The bank catered to tech startups and venture-capital firms. Deposits grew rapidly and were placed in long-dated bonds, particularly government-backed mortgage securities. As the Federal Reserve began aggressively raising interest rates roughly a year ago, funding sources for tech startups dried up, putting pressure on deposits. At the same time, Fed rate hikes triggered a historic bond-market selloff, putting a big dent in the value of SVB’s securities holdings.
SVB was forced to sell a large chunk of those holdings at a loss to meet withdrawals, leading it to plan a dilutive share offering that stoked a further run on deposits and ultimately led to its collapse.
Analysts and economists largely dismissed the notion that SVB’s woes marked a systemic problem in the banking system.
Instead, SVB appears to be a “a rather special case of poor balance-sheet management, holding massive amounts of long-duration bonds funded by short-term liabilities,” said Erik F. Nielsen, group chief economics adviser at UniCredit Bank, in a Sunday note.
“I’ll stick my neck out and suggest that markets are vastly overreacting,” he said.
Implications for the Fed’s monetary policy path also loom large. Fed-funds futures traders last week moved to price in a more-than-70% chance of an outsize 50-basis-point, or half a percentage point, rise in the benchmark interest rate at the Fed’s March meeting after Chair Jerome Powell told lawmakers that rates would need to move higher than previously anticipated.
Expectations swung back to a 25-basis-point, or quarter-point move, as the SVB collapse unfolded, with traders also scaling back expectations for when rates will likely peak.
Meanwhile, a flight to safety saw the yield on the 2-year Treasury note, which had earlier in the week topped 5% for the first time since 2007, end the week down 27.3 basis points at 4.586%.
The market reaction wasn’t unusual, said Michael Kramer of Mott Capital Management, in a Sunday note, and should reverse once the situation around SVB calms down.
Powell said incoming economic data would determine the size of the Fed’s next rate move. The market reaction to a stronger-than-expected rise in February nonfarm payrolls, which was tempered by a slowdown in wage growth and a rise in the unemployment rate, was clouded by the tumult around SVB.
“I think they will raise rates by at least 25 basis points and signal that more rate hikes are coming,” Kramer said. “If they were to pause rate hikes unexpectedly, it would send a warning message that they are seeing something of grave concern, causing a significant change in their policy path, and that would not be bullish for stocks.”
A trader works on the floor of the New York Stock Exchange (NYSE) in New York on Monday, Sept. 20, 2021. The Silicon Valley Bank situtation is a “timely reminder” that when the Fed is focused on reining in inflation with interest rate hikes “it often ends up breaking things,” one economist said Friday.
Michael Nagle/Bloomberg
Traders are steeling themselves for the risk of more turbulence after the biggest U.S. bank collapse since the 2008 financial crisis sent shockwaves through markets.
The unravelling of SVB Financial Group’s Silicon Valley Bank was driven in large part by the fallout from higher U.S. interest rates, prompting questions about whether other institutions might also be at risk as investors debate just how much further the U.S. central bank is likely to tighten policy. Meanwhile, the outlook for the economy — and likely policy responses to it — remain in flux.
Foreign-exchange markets will be the first to take the spotlight as the new week begins and Asia-Pacific trading gets underway Monday. Traders will be keen to see whether haven currencies such as the Swiss franc and Japanese yen extend the gains they made Friday, and whether the dollar continues to move lower along with expectations for shorter-term Treasury yields.
“The market is flitting from theme to theme, unveiling underlying fragility,” JPMorgan Chase strategists including Meera Chandan wrote in a note to clients Friday.
Attention will be keenly focused on anything that gives clues about the next steps from the Federal Reserve and its global peers — or hints at greater spillover in the U.S. banking sector beyond SVB.
The Federal Deposit Insurance Corp. and the central bank were weighing creating a fund that would allow regulators to backstop more deposits at banks that run into trouble, according to people familiar with the matter. Meanwhile, U.S. regulators overseeing SVB’s breakup were racing to sell assets and make a portion of clients’ uninsured deposits available as soon as Monday, people familiar said.
For Fed policy observers, a major focus of the week is likely to be Tuesday’s consumer-price inflation reading. In the euro area, the key event is Thursday’s European Central Bank decision, at which officials are widely expected to jack up rates by a half point.
It was a wild ride for markets last week. Expectations for Fed rate increases surged in the wake of hawkish comments by Chair Jerome Powell, only to be reversed as fears around the banking sector and a mixed report on jobs helped fuel a rally in Treasuries. By week’s end, the market was back to pricing a quarter-point Fed hike as the most likely outcome, having at one stage come around to the idea of a half point.
The two-day drop in the two-year Treasury yield seen on Thursday and Friday was of a scale last seen amid the global crisis of 2008, while an index of U.S. bank stocks notched its worst week since the early part of the COVID pandemic in 2020. The Bloomberg Dollar Spot Index fell as much as 0.9% at one stage on Friday, the biggest intraday drop since early January. It ended just 0.4% lower on the day and remained up on the week.
The SVB situation is a “timely reminder” that when the Fed is focused on reining in inflation with interest rate hikes “it often ends up breaking things,” Capital Economics’ Chief North America Economist Paul Ashworth wrote in a note Friday. “Regardless of whether the problems show up first in the real economy, asset markets or the financial system, they can trigger an adverse feedback loop that develops into a hard landing, which takes down all of them.”
China will also be in focus for many traders as the week gets underway following the reappointment of several top economic officials. People’s Bank of China Governor Yi Gang, 65, will remain in his post, as will the finance and commerce ministers. The retention of Yi and others — announced at the National People’s Congress, the annual parliamentary gathering — surprised analysts who were expecting a larger reshuffle. Meanwhile, He Lifeng, a close ally of President Xi Jinping, was appointed a vice premier, signaling he could replace Liu He as the nation’s top economic official.
Hedge funds are offering to buy startup deposits at Silicon Valley Bank (SVB) for as little as 60 cents on the dollar, Semafor reported on Saturday, citing people familiar with the matter.
Bids range from 60 to 80 cents on the dollar, the report said adding that the range reflects expectations for how much of the uninsured deposits will be eventually recovered once the bank’s assets are sold or wound down.
Firms like Oaktree which are known for investing in distressed debt are contacting startup businesses after SVB’s SIVB, -60.41%
seizure by the Federal Deposit Insurance Corp (FDIC), the report said.
Traders from investment bank Jefferies are also contacting startup founders with deposits at the bank, offering to buy their deposit claims at a discount, The Information reported separately.
Jefferies is offering at least 70 cents on the dollar for deposit claims, the report said, citing several people with direct knowledge of the matter.
Oaktree declined to comment on the reports. Jefferies could not be immediately reached for comment.
Silicon Valley Bank was taken over by the U.S. Federal Deposit Insurance Corporation on Friday after depositors, concerned about the lender’s financial health, rushed to withdraw their their deposits. The two-day run on the bank stunned markets, wiping out more than $100 billion in market value for U.S. banks.
Trading in shares of First Republic, Western Alliance, Signature and PacWest was halted on Friday following the failure of Silicon Valley Bank.
The abrupt failure of Silicon Valley Bank, which spent years carving a wide niche in the technology industry, sparked a selloff among other banks that also have exposure to the same once-fast-growing sector.
Shares of Western Alliance Bancorp, PacWest Bancorp, Signature Bank and First Republic Bank closed the day down between 16% and 38%. Trading in the four banks’ stocks was halted Friday when shares in each of the companies fell to their lowest levels since 2020.
The declines far exceeded the share-price losses of U.S. banks overall. The KBW Nasdaq Banking Index, which serves as an industry benchmark tracking large and regional banks, closed down less than 4%.
The shutdown of Silicon Valley came less than 48 hours after the banking arm of SVB Financial Group in Santa Clara, California, sold a large portfolio of securities at an after-tax loss of $1.8 billion and announced a capital-raising plan that ultimately failed to close.
The company has been steeped in deposit challenges for much of the past year due to a downturn in the venture capital investments, which led to outflows of noninterest-bearing deposits.
Silicon Valley Bank’s demise raised questions about the level of risk at other banks that hold tech-related deposits. First Republic, PacWest, Signature and Western Alliance were the only U.S. banks that had stock trading halted on Friday.
At Phoenix-based Western Alliance, about $6.5 billion, or around 11%, of the company’s total deposits, are tied to the technology industry, according to the company. Meanwhile, close to 30% of deposits are tech-related at PacWest, the Los Angeles-based parent company of Pacific Western Bank, according to Gary Tenner, an analyst at D.A. Davidson.
“Not that their exposures should be ignored, but it feels like the [stock price] reaction is overdone, especially for the second day in a row,” Tenner said Friday in an interview with American Banker.
In response to the failure of Silicon Valley, both Western Alliance and San Francisco-based First Republic sought to assure investors Friday that they remain on solid ground.
Western Alliance said in a press release that its deposits, liquidity and capital positions remain strong. The company’s total deposits have increased by $7.8 billion since the end of 2022, and they currently total $61.5 billion, Western Alliance said. At the same time, its tech-related deposits have dropped by $201 million so far this quarter, the company noted.
At First Republic, technology-related deposits represent about 4% of total deposits, and the bank maintains strong capital and liquidity positions, the company said Friday in a regulatory filing. In addition to its “strong and very-well diversified” base of deposits, the bank said it has more than $60 billion available to borrow from the Federal Reserve and the San Francisco Home Loan Bank.
The banks that watched their stock prices plummet after news of Silicon Valley’s collapse could be the same ones that benefit when the failed bank’s customers move their money elsewhere, one analyst noted.
“You have to assume that all of those Western banks that are players in California could pick up business,” Chris Marinac, an analyst at Janney Montgomery Scott, said in an interview Friday.
The nation’s largest banks, too, could benefit from an influx of deposits that were formerly held at Silicon Valley Bank, said Casey Haire, a Jefferies analyst who has covered SVB Financial since 2009. He ticked off names such as JPMorgan Chase and Bank of America.
Technology companies may choose to place their deposits with the “too big to fail crowd … out of an abundance of caution,” he said.
Like Silicon Valley Bank, where just 2.7% of deposits met the requirements for deposit insurance in the fourth quarter of 2022, some of the other banks that saw big stock price declines on Friday have relatively small shares of their deposits in accounts with less than $250,000, according to an analysis by RBC Capital Markets.
About 6% of New York-based Signature’s $88.6 billion in deposits were in accounts with less than $250,000 in the fourth quarter, RBC said. The percentage of deposits covered by insurance was 19.2% at First Republic and 23.2% at Western Alliance, according to the analysis.
Meanwhile, PacWest was around the industry midpoint, with deposits less than $250,000 accounting for 40% of its total deposits, the RBC Capital Markets analysis found.
Tenner, who covered bank failures during the financial crisis, said the shutdown of Silicon Valley Bank “feels different [than earlier failures] because of the speed from start to finish of the whole thing.”
“Back in the financial crisis, where banks were failing, there was a little more foresight because it was a credit-driven event and people had a view of who was suffering more than others,” he said. “[SVB] was effectively a 36-hour illness that went the wrong way — straight to the morgue.”
Should bank stocks like Western Alliance and PacWest decline again on Monday, it would show “there’s a great deal of fear and uncertainty in the market,” Tenner said.
Silicon Valley Bank has failed following a run on deposits, after its parent company’s share price crashed a record 60% on Thursday.
Trading of SVB Financial Group’s SIVB, -60.41%
stock was halted early Friday, after the shares plunged again in premarket trading. Treasury Secretary Janet Yellen said SVB was one of a few banks she was “monitoring very carefully.” Reaction poured in from several analysts who discussed the bank’s liquidity risk.
Below is the same list of 10 banks we highlighted on Thursday that showed similar red flags to those shown by SVB Financial through the fourth quarter. This time, we will show how much they reported in unrealized losses on securities — an item that played an important role in SVB’s crisis.
Below that is a screen of U.S. banks with at least $10 billion in total assets, showing those that appeared to have the greatest exposure to unrealized securities losses, as a percentage of total capital, as of Dec. 31.
First, a quick look at SVB
Some media reports have referred to SVB of Santa Clara, Calif., as a small bank, but it had $212 billion in total assets as of Dec. 31, making it the 17th largest bank in the Russell 3000 Index RUA, -1.70%
as of Dec. 31. That makes it the largest U.S. bank failure since Washington Mutual in 2008.
One unique aspect of SVB was its decades-long focus on the venture capital industry. The bank’s loan growth had been slowing as interest rates rose. Meanwhile, when announcing its $21 billion dollars in securities sales on Thursday, SVB said it had taken the action not only to lower its interest-rate risk, but because “client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted.”
SVB estimated it would book a $1.8 billion loss on the securities sale and said it would raise $2.25 billion in capital through two offerings of new shares and a convertible bond offering. That offering wasn’t completed.
So this appears to be an example of what can go wrong with a bank focused on a particular industry. The combination of a balance sheet heavy with securities and relatively light on loans, in a rising-rate environment in which bond prices have declined and in which depositors specific to that industry are themselves suffering from a decline in cash, led to a liquidity problem.
Unrealized losses on securities
Banks leverage their capital by gathering deposits or borrowing money either to lend the money out or purchase securities. They earn the spread between their average yield on loans and investments and their average cost for funds.
The securities investments are held in two buckets:
Available for sale — these securities (mostly bonds) can be sold at any time, and under accounting rules are required to be marked to market each quarter. This means gains or losses are recorded for the AFS portfolio continually. The accumulated gains are added to, or losses subtracted from, total equity capital.
Held to maturity — these are bonds a bank intends to hold until they are repaid at face value. They are carried at cost and not marked to market each quarter.
In its regulatory Consolidated Financial Statements for Holding Companies—FR Y-9C, filed with the Federal Reserve, SVB Financial, reported a negative $1.911 billion in accumulated other comprehensive income as of Dec. 31. That is line 26.b on Schedule HC of the report, for those keeping score at home. You can look up regulatory reports for any U.S. bank holding company, savings and loan holding company or subsidiary institution at the Federal Financial Institution Examination Council’s National Information Center. Be sure to get the name of the company or institution right — or you may be looking at the wrong entity.
Here’s how accumulated other comprehensive income (AOCI) is defined in the report: “Includes, but is not limited to, net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, cumulative foreign currency translation adjustments, and accumulated defined benefit pension and other postretirement plan adjustments.”
In other words, it was mostly unrealized losses on SVB’s available-for-sale securities. The bank booked an estimated $1.8 billion loss when selling “substantially all” of these securities on March 8.
The list of 10 banks with unfavorable interest margin trends
On the regulatory call reports, AOCI is added to regulatory capital. Since SVB’s AOCI was negative (because of its unrealized losses on AFS securities) as of Dec. 31, it lowered the company’s total equity capital. So a fair way to gauge the negative AOCI to the bank’s total equity capital would be to divide the negative AOCI by total equity capital less AOCI — effectively adding the unrealized losses back to total equity capital for the calculation.
Getting back to our list of 10 banks that raised similar red margin flags to those of SVB, here’s the same group, in the same order, showing negative AOCI as a percentage of total equity capital as of Dec. 31. We have added SVB to the bottom of the list. The data was provided by FactSet:
Read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
Ally Financial Inc. ALLY, -5.70%
— the third largest bank on the list by Dec. 31 total assets — stands out as having the largest percentage of negative accumulated comprehensive income relative to total equity capital as of Dec. 31.
To be sure, these numbers don’t mean that a bank is in trouble, or that it will be forced to sell securities for big losses. But SVB had both a troubling pattern for its interest margins and what appeared to be a relatively high percentage of securities losses relative to capital as of Dec. 31.
Banks with the highest percentage of negative AOCI to capital
There are 108 banks in the Russell 3000 Index RUA, -1.70%
that had total assets of at least $10.0 billion as of Dec. 31. FactSet provided AOCI and total equity capital data for 105 of them. Here are the 20 which had the highest ratios of negative AOCI to total equity capital less AOCI (as explained above) as of Dec. 31:
Again, this is not to suggest that any particular bank on this list based on Dec. 31 data is facing the type of perfect storm that has hurt SVB Financial. A bank sitting on large paper losses on its AFS securities may not need to sell them. In fact Comerica Inc. CMA, -5.01%,
which tops the list, also improved its interest margin the most over the past four quarters, as shown here.
Another bank on the list facing concern among depositors is Signature Bank SBNY, -22.87%
of New York, which has a diverse business model, but has also faced a backlash related to the services it provides to the virtual currency industry. The bank’s shares fell 12% on Thursday and were down another 24% in afternoon trading on Friday.
Signature Bank said in a statement that it was in a “strong, well-diversified financial position.”
Heavy trading in SVB Financial Group’s SIVB,
debt pulled its BBB-rated 10-year bonds as low as 31 cents on the dollar on Friday after subsidiary Silicon Valley Bank was closed by regulators, marking the biggest bank failure since the financial crisis.
The Santa Clara, Calif.–based financial-services company has been reeling in recent days, with both its stock and bond prices hit hard, after it on Thursday disclosed a $1.8 billion loss from a sale of about $21 billion in securities.
Its bond prices lost further ground Friday after the California Department of Financial Protection and Innovation closed Silicon Valley Bank, placing the Federal Deposit Insurance Corp. in control of its assets.
Silicon Valley Bank had an estimated $209 billion in total assets and about $175.4 billion in deposits as of Dec. 31, according to the FDIC.
SVB Financial’s 4.57% bonds due April 2023 traded as low as 31 cents on the dollar on Friday in heavy trading, according to BondCliq. Since the low, the debt traded up to 38.50 cents. A week ago it was fetching 90 cents. Prices on U.S. corporate bonds below 70 cents on the dollar are broadly considered distressed.
Worries about distress at Silicon Valley Bank, and potential risks in the broader distress in the banking system, have weighed on shares and the debt of financial companies.
Bonds in the financial sector were broadly under pressure Friday, including debt issued by Bank of America Corp. BAC, -0.97%,
JPMorgan Chase and Co. JPM, +2.70%,
Goldman Sachs Group Inc. GS, -3.69%,
Morgan Stanley MS, -1.56%
and other major banks, according to BondCliq.
Shares of the Invesco KBW Bank ETF KBWB, -3.26%
were down 16% on the week through midday Friday, with some investors expressing concern about potential cracks in the financial system following a year of aggressive interest-rate hikes by the Federal Reserve.
Barclays analysts said Friday that they viewed the collapse of Silicon Valley Bank as an “isolated event, but that it still “raises risks of broader distress within the banking system” that could throw cold water on talk of a Fed interest-rate hike in March of 50 basis points vs. 25 basis points.
“Indeed, the possibility of capital losses at other institutions cannot be completely dismissed, with rising policy rates raising banks’ funding costs, more elevated longer-term rates exerting pressure on asset valuations, and potential loan losses related to idiosyncratic credit exposures.”
Shares of SBV Financial were halted Friday, but they are down about 54% on the year, according to FactSet. The S&P 500 index SPX, -1.11%
was down about 1.2% Friday afternoon, while the Dow Jones Industrial Average DJIA, -0.82%
fell 0.8% and the Nasdaq Composite COMP, -1.47%
was 1.7% lower.
Silicon Valley Bank has been closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation (FDIC) has been appointed receiver, becoming the first FDIC-backed institution to fail this year.
The FDIC, which insures deposits of up to $250,000 at eligible banks, said all insured depositors will have full access to their accounts no later than Monday morning. Uninsured depositors will get a receivership certificate and may be entitled to dividends once the FDIC sells the bank’s assets.
The bank had 13 branches in California and Massachusetts and will reopen on Monday. As of Dec. 31, it had about $209 billion in total assets, and about $175.4 billion in deposits.
That makes it the biggest bank failure since Washington Mutual Inc. was brought down during the financial crisis of 2008.
“At the time of closing, the amount of deposits in excess of the insurance limits was undetermined,” said the FDIC. “The amount of uninsured deposits will be determined once the FDIC obtains additional information from the bank and customers.”
Customers with more than $250,000 in their accounts should contact the FDIC at 1-866-799-0959.
The last FDIC-backed bank to close was Almena State Bank, Almena, Kansas, back in October of 2020, said the FDIC.
The bank’s collapse has come swiftly just days after the parent announced a huge loss on bondholdings after it was caught out by interest rate increases. Some venture-capital firms reportedly told their startup clients to pull their money from the bank, triggering a classic run on the bank.
On Friday, employees were told to “work from home today and until further notice,” the Wall Street Journal reported, citing an email it had obtained.
U.S. stocks ended sharply lower Friday as investors parsed mixed signals from the February jobs report amid ongoing concerns about contagion in the banking sector from the troubles at Silicon Valley Bank.
How stocks traded
The Dow Jones Industrial Average DJIA, -1.07%
dropped 345.22 points, or 1.1%, to close at 31,909.64, its fourth straight day of declines for its longest losing streak since December.
The S&P 500 SPX, -1.45%
fell 56.73 points, or 1.4%, to finish at 3,861.59.
Nasdaq Composite COMP, -1.76%
sank 199.47 points, or 1.8%, to end at 11,138.89.
For the week, the Dow sank 4.4%, S&P 500 dropped 4.5% and the Nasdaq shed 4.7%, according to Dow Jones Market Data. The Dow booked its worst week since June, the S&P 500 saw its biggest weekly percentage decline since September, and the Nasdaq had its biggest percentage slide since November.
What drove markets
U.S. stocks slumped amid investor concerns about the banking sector after the closure of Silicon Valley Bank by the Federal Deposit Insurance Corp and in the wake of the monthly employment report released Friday.
In a sign of investor anxiety, the CBOE Volatility Index VIX, +9.69%
was up Friday afternoon at almost 25, after jumping Thursday, according to FactSet data, last check.
“Bears came out of hibernation this week after waking up to a warning shot from the banking space,” said Adam Turnquist, chief technical strategist for LPL Financial, in emailed comments Friday, pointing to the collapse of Silicon Valley Bank.
Silicon Valley Bank was closed Friday by the California Department of Financial Protection and Innovation. The Federal Deposit Insurance Corp. was appointed receiver, with the bank becoming the first FDIC-backed institution to fail this year.
The SPDR S&P Regional Banking ETF KRE, -4.39%
was down more than 4% Friday afternoon, FactSet data show, while shares of Bank of America Corp. BAC, -0.88%
closed 0.9% lower, Citigroup Inc. C, -0.53%
slid 0.5% and JPMorgan Chase & Co. JPM, +2.54%
rose 2.5%.
Worries over the banking sector are “probably overshadowing” the positive aspects of the employment report, said Karim El Nokali, investment strategist at Schroders, in a phone interview Friday.
The U.S. employment report for February showed the labor market continued to grow at a robust pace last month, with the U.S. economy adding 311,000 jobs, more than the 225,000 that economists polled by the Wall Street Journal had expected.
But “if you dig a little deeper” into the report, average hourly earnings came in “a little lighter than expected” while labor-force participation ticked up, which are positive developments from an inflation standpoint, said El Nokali.
Average hourly wages grew by 0.2%, a slower rate than the 0.3% rate economists had expected. It was also less than the 0.3% increase in January. The unemployment rate ticked higher to 3.6%, helped by an increase in the labor-force participation rate.
“On the margin,” said El Nokali, the employment report was “positive for the equity market.” He said it would “probably argue more” for the Federal Reserve to raise its benchmark rate by 25 basis points at its policy meeting later this month, as opposed to a 50-basis-point hike that investors had been fearing leading up to the employment data.
Fed Chair Jerome Powell said earlier this week that the “totality” of jobs and inflation data would determine whether the central bank would go back to raising its policy interest rate by another 50 basis points at its meeting later in March.
After climbing earlier in the week, odds of a 50-basis-point rate hike by the Fed have moderated over the past 24 hours. Traders now see a 62% chance of the central bank raising its benchmark rate by 25 basis points, according to the CME FedWatch Tool.
Meanwhile, Treasury yields sank Friday.
The yield on the 2-year Treasury note TMUBMUSD02Y, 4.594%
dropped 31.4 basis points to 4.586%, while the 10-year Treasury yields fell 22.8 basis points to 3.694%, according to Dow Jones Market Data. The Treasury yield curve remains massively inverted, which has contributed to banks’ woes.
Companies in focus
SVB Financial Group, the parent of Silicon Valley Bank, saw its shares halted for volatility after falling 60% on Thursday. The bank was taken over by the FDIC helping to a broader selloff in regional and international U.S. banks that has weighed on the broader market.
Barnes & Noble Education Inc. BNED, +6.98%
climbed 7% after the company trimmed its third-quarter loss to 48 cents per share from a loss of 71 cents a year ago.
Oracle Corp. ORCL, -3.22%
shares dropped 3.2% after the software company’s fiscal third-quarter revenue fell short of Wall Street expectations. Adjusted earnings were $1.22 per share, compared to $1.13 in the year-ago period.
Gap Inc. GPS, -6.13%
shares slid 6.1% after the clothing retailer predicted first-quarter sales could fall “in the mid-single-digit range” compared to the same quarter last year. The company said it would lay off executives and thin management layers as part of a bid to cut $300 million in costs.
U.S. Treasury Secretary Janet Yellen said Friday she’s tracking a number of banks as Silicon Valley Bank has faced major problems.
“You mentioned Silicon Valley Bank,” Yellen said, as she responded to a lawmaker while testifying before a House Ways and Means Committee hearing.
“There are recent developments that concern a few banks that I’m monitoring very carefully, and when banks experience financial losses, it is and it should be a matter of concern.”
The stock of Silicon Valley Bank parent company SVB Financial Group SIVB, -60.41% had plunged after the company disclosed large losses from securities sales.
Later Friday, as the committee hearing still was underway, the Federal Deposit Insurance Corporation said Silicon Valley Bank had been closed by a California regulator.
SVB has been seeking a buyer after scrapping a plan to shore up its finances through a stock offering, and as it faced widespread customer withdrawals, according to a Wall Street Journal report published earlier Friday.
Sen. Sherrod Brown, the Ohio Democrat who heads the Senate Banking Committee, is “monitoring the situation closely,” a spokeswoman said Friday.
“The FDIC and other banking regulators are on the job to protect insured depositors and our banking system,” she added.
Billionaire hedge fund manager Bill Ackman had suggested that government intervention could be needed.
“If private capital can’t provide a solution, a highly dilutive government preferred bailout should be considered,” Ackman said on Twitter late Thursday.
U.S. stocks extended losses in the final hour of trade on Thursday, while awaiting Friday’s February employment data that could help decide how large an interest rate hike the Federal Reserve will impose at its next meeting in two weeks.
Financial sector stocks were particularly hard hit along with cryptocurrencies after Silvergate Capital Corp., collapsed overnight amid growing scrutiny in Washington. Other financial stocks fell, dragged down by SVB Financial Group, which fell by a record amount.
How are stocks trading
The S&P 500 SPX, -1.85%
dropped 56 points, or 1.4%, to 3,936
Dow Jones Industrial Average DJIA, -1.66%
was off 412 points, or 1.3%, to 32,387
Nasdaq Composite COMP, -2.05%
declined by 174 points, or 1.5%, to 11,399
Both the S&P 500 and Nasdaq finished higher on Wednesday, with only the Dow finishing in the red, while all three indexes remained on track for weekly losses. A weekly drop for the S&P 500 would mark its fourth such pullback in five weeks.
What’s driving markets
U.S. stocks trimmed earlier gains and extended losses on Thursday afternoon after trading modestly higher after the open when the latest weekly jobless claims data showed an unexpectedly large uptick in the number of Americans filing for unemployment benefits.
Economists said the data suggest that the labor market might be starting to slow, which is seen as a necessary prerequisite for driving inflation back to the Fed’s 2% target.
“The labor market might just be on the cusp of an inflection point,” said Peter Boockvar, chief investment officer of Bleakley Financial Group, in emailed commentary.
Investors are now looking ahead to Friday’s closely watched February jobs report from the Department of Labor. Economists polled by the Wall Street Journal expect 225,000 jobs were created last month after 517,000 new jobs were created in January, a number that was much higher than economists had anticipated.
“If we do get the expected 200,000, or really anything between say 180,000 and 240,000, this would be a return to the prior trend and would signal that last month was indeed a one-off,” said Brad McMillan, chief investment officer of Commonwealth Financial Network, in emailed comments.
“That would be perceived as a positive by the Fed and markets, suggesting that inflation may start moderating again but is still high enough to allow for continued economic growth.”
The Russell 2000 RUT, -2.75%,
the small-cap index, is on pace to close below its 50-day moving average for the first time since January 9, 2023, according to Dow Jones Market Data.
Regional bank stocks underperformed on Thursday. Shares of Silicon Valley Bank parent company SVB Financial Group SIVB, -60.41%
plummeted more than 61% after the company disclosed large losses from securities sales and a stock offering meant to provide a boost to its balance sheet. SVB is on pace to book the biggest one-day selloff since the dotcom boom, while its trading was halted for volatility multiple times, according to Dow Jones Market Data.
The KBW Bank Index BKX, -7.70%
of 24 leading banks slumped 7.1%, on pace for its worst day since June 26, 2020, according to Dow Jones Market Data. SPDR S&P Bank ETF KBE, -7.30%
was down 6.5%.
Treasury yields fell with the yield on the 2-year note BX:TMUBMUSD02Yslipped to 4.885% from 5.064% on Wednesday.
Stocks suffered earlier in the week after Powell said during testimony on Capitol Hill that rates would likely need to rise even further than market participants had expected. However, the main indexes saw some relief after the Fed chief clarified that policymakers hadn’t yet decided on the size of the next rate hike.
Investors have already digested several reports on the labor market this week, including a report on the number of job openings, which showed that the number of Americans quitting their jobs had fallen below 4 million in January for the first time in 19 months.
“The big picture is that the labor market is easing, but it’s still tighter than it was before the pandemic,” said Sonu Varghese, a global macro strategist at Carson Group.
Uber Technologies Inc. UBER, -4.94%
shares dropped 4.4% on Thursday after Bloomberg reported on Wednesday that the ride-hailing food and package delivery company was considering a spinoff of its struggling Uber Freight business.
General Motors Co. GM, -4.88% slipped 4.1% after the automaker announced a voluntary buyout program that’s expected to lead to an employee separation charge of $1.5 billion.
Shares of Silicon Valley Bank parent company SVB Financial Group plummeted Thursday toward the biggest one-day selloff since the dotcom boom, after the Santa Clara, Calif.-based financial-services company disclosed large losses from securities sales and a stock offering meant to provide a boost to its balance sheet.
The bank SIVB, -43.86%,
which helps fund technology startups backed by venture-capital firms, said it took the “strategic actions” to strengthen its financial position as rising interest rates increase pressure on public and private markets and as clients face elevated cash burn levels.
SVB also cut its first-quarter guidance ranges for net interest income (NII) to $880 million-$900 million from $925 million-$955 million and for net interest margin (NIM) to 1.75%-1.79% from 1.85%-1.95%. The outlook for declines in average deposits was increased to the low-double-digit percentage range from mid single digits.
“While VC deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted,” Chief Executive Greg Becker wrote in a letter to shareholders. “The related shift in our funding mix to more, higher-cost deposits and short-term borrowings, coupled with higher interest rates, continues to pressure NII and NIM.”
The stock dove 41% in morning trading, outpacing the S&P 500’s SPX, +0.02%
losers by a wide margin. It was suffering the biggest one-day selloff since its record 42.3% decline on Sept. 10, 1998.
SVB said late Wednesday it sold about $21 billion worth of its available-for-sale securities. As of Dec. 31, the company had $26.1 billion in AFS securities.
The sale will result in a loss of about $1.8 billion in the first quarter of 2023, while the FactSet consensus for first-quarter net income was $274.8 million.
“The sale of substantially all of our AFS securities will enable us to increase our asset sensitivity, partially lock in funding costs, better insulate net interest income (NII) and net interest margin (NIM) from the impact of higher interest rates, and enhance profitability,” Becker wrote.
Separately, the company said it plans to offer for sale $2.25 billion worth of equity securities to bolster its financial position.
The offering includes $1.25 billion worth of common stock, which represents 13.4% of the company’s current market capitalization of $9.33 billion, and $500 million worth of mandatory convertible preferred stock. SVB has also entered into an agreement with private-equity investor General Atlantic to buy $500 million worth of common stock in a separate private transaction.
“Our financial position enables us to take these strategic actions, which are intended to further bolster that position now and over the long term,” the bank said in a statement.
JPMorgan analyst Steven Alexopoulos cut his stock-price target to $270 from $300 but reiterated the overweight rating he’s had on SVB for at least the past three years. The stock target is above Tuesday’s closing price of $267.83.
“While this is yet another setback that will result in another negative [earnings-per-share] revision, we continue to believe that it remains a question of when rather than if the war chest of dry powder on the sidelines starts to get deployed at a much more rapid pace,” Alexopoulos wrote in a note to clients.
The stock, which was headed for its lowest close since April 2020, has tumbled 28.3% over the past three months and plunged 70.7% over the past 12 months. In comparison, the Financial Select Sector SPDR exchange-traded fund XLF, -2.06%
has lost 7.1% over the past year and the S&P 500 has shed 6.6%.
Credit Suisse Group AG said Thursday that it will delay the publication of its 2022 report after a late call from U.S. market regulators over 2019 and 2020 cash-flow statements, adding a further headache as the lender attempts to woo back clients amid a costly turnaround effort.
CS, +0.35%
said it received a call from the U.S. Securities and Exchange Commission on Wednesday in relation to certain open SEC comments about the technical assessment of previously disclosed revisions to its consolidated cash-flow statements in the 2020 and 2019 fiscal years as well as related controls.
“Management believes it is prudent to briefly delay the publication of its accounts in order to understand more thoroughly the comments received,” Credit Suisse said.
The company said it wouldn’t affect its 2022 financial results released early in February.
Credit Suisse’s share price hit a low in the weeks since the 2022 results on uncertainty about its future, with analysts fearing that recent large outflows from customers will hinder a recovery.
Silvergate Capital Corp. SI, -5.76%
shares plunged more than 30% in after-hours trading Wednesday after the company said it intended to wind down operations and voluntarily liquidate its subsidiary Silvergate Bank, a crypto-friendly lender.
The stock’s plunge would take it to a record low if losses hold through regular trading Thursday.
The La Jolla, Calif.-based lender made the announcement after it said last week in a regulatory filing that it was at risk of “being less than well-capitalized,” and discontinued its crypto-payments network.
As one of the few crypto-friendly banks, the liquidation of Silvergate Bank points to uncertainty in the future relationships between crypto companies and banks, who play an essential role in the conversion of fiat currencies into crypto.
Silvergate Bank’s liquidation plan includes full repayment of all deposits, according to a statement Wednesday.
The company is considering the best way to resolve claims and preserve the residual value of its assets, Silvergate Capital said. All of the company’s other deposit-related services remain operational, it said.
Silvergate also said it hired Centerview Partners as financial adviser and Cravath, Swaine & Moore LLP as legal adviser.
Representatives at Silvergate didn’t immediately respond to a request seeking comment.
Signature Bank SBNY, -1.47%,
another crypto-friendly lender, saw its shares slide 3.7% in after-hours trading Wednesday.
Major cryptocurrencies were steady Wednesday. Bitcoin BTCUSD, -1.30%
lost 0.3% to around $21,981, while ether ETHUSD, -1.12%
gained 0.2% to about $1,550, according to CoindDesk data.
Bank notes from the 19th century, prior to the creation of the Federal Reserve. The period from 1867-1904 was a time of great fragmentation in the U.S. banking system.
Jazmine – stock.adobe.com
The newest toy for banking historians dropped this week — a dataset that will help illustrate how the U.S. banking system developed after the Civil War.
The tool, developed by Federal Reserve researchers, will give historians and students a far easier way of examining national banks’ financial performance between 1867 and 1904.
The period is of massive historical importance, covering the early start of the reworked banking system that Abraham Lincoln imagined to help finance the war and strengthen the country’s monetary system.
The data set ends in 1904, when banks switched to a new reporting format. At the time, a series of financial crises had spurred calls for the formation of a central bank to limit painful credit crunches. The ensuing debate would soon culminate in the creation of today’s Fed, whose balance of national and regional powers reflected skepticism over a fully Washington-led institution.
“I think there’s going to be a multitude of rich projects that result from this going into the future,” said Providence College professor Sharon Ann Murphy, who focuses on pre-Civil War banking and is the author of a new book on banks’ role in the rapid growth of slavery. “So I’m excited.”
The data itself is not new. It consists of call reports that banks filed with the Office of the Comptroller of the Currency between 1867 and 1904.
What’s new is that two Fed researchers — Stephan Luck of the New York Fed and Sergio Correia of the Fed board — digitized each call report and published a free database that users can use to easily compare changes in banks’ lending, profits, deposits and other key metrics. Users can also focus on trends in specific states or cities, and examine how national banks popped up in the West in the late 19th century.
Undertaking those analyses has always been possible, but it previously required a substantial amount of manual typing of data to put everything in a usable format.
The tool will be particularly useful for graduate and undergraduate students, as it will make it far easier for them to conduct analyses, according to Charles Calomiris, a Columbia Business School professor and a former OCC chief economist.
“You’re going to be able to do just an unbelievable amount of things,” said Calomiris, the author of the book, “Fragile By Design: The Political Origins of Banking Crises and Scarce Credit.”
Calomiris likened the dataset to the Federal Reserve Bank of St. Louis’ efforts to increase the visibility of economic data and history. The St. Louis Fed’s FRED website includes hundreds of thousands of economic data points, while its FRASER site has historical industry and government documents.
The world of post-Civil War banking gives researchers a “great window” into the rapid growth of the U.S. economy and key political debates, Calomiris said. Given how fragmented the banking system was at the time, researchers can explore how events like droughts and the era’s several financial panics affected the economies of individual states.
The period was one of “significant financial instability,” with little regulation, no central bank, no federal deposit insurance and rampant speculation on Wall Street, said Sean Vanatta, a U.S. history professor at the University of Glasgow who studies banking.
He credited the Fed researchers for publishing the dataset, saying it and other digitized versions of historical banking data open up “a lot of new opportunities” for research.
“It gives you the life story of these banks,” said Vanatta, who, along with Peter Conti-Brown, is the co-author of the forthcoming book, “The Banker’s Thumb: A History of Bank Supervision in the United States.”
“You can see over time how banks’ businesses are changing and developing, and also you can position those banks in relation to their competitors in local markets and position them in relation to banks across the nation,” Vanatta said.
Still, Vanatta cautioned that researchers may have to dig beyond just the numbers.
In some cases, call reports from bank examiners in the post-Civil War era questioned the validity of bank-provided data, he said. Other cases may highlight the revolving door between banks and their supervisors in the 19th century.
In the banking industry, government examiners were the ones looking to standardize bank accounting, but Vanatta said there wasn’t “that much uniformity” in the early days.
“That, in and of itself, is an interesting story,” Vanatta said. “How do we get new categories of bank assets or bank liabilities? Who makes that decision? What makes it necessary to create these new categories?”
At close to a third of banks analyzed by Janney, the loan-to-deposit ratio increased by at least 10 percentage points between the fourth quarter of 2021 and the same period last year.
Adobe Stock
While most banks still have plenty of liquidity, a growing segment of financial institutions is seeing their lending obligations outpace deposits, and sometimes at a rapid pace.
More than 85% of more than 800 U.S. commercial banks saw increases in their loan-to-deposit ratios between the fourth quarter of 2021 and the fourth quarter of 2022, according to a Janney analysis of FDIC call-report data. At close to a third of the banks, the loan-to-deposit ratio increased by at least 10 percentage points.
A decline in deposits at many banks is putting pressure on loan-to-deposit ratios, a key metric of bank liquidity. Even as loan demand wanes in many categories, loan-to-deposit ratios are rising at some banks. Banks with higher loan-to-deposit ratios may face challenges if they run into unexpected funding needs.
“We’ve seen a continual slew of banks on their earnings calls kind of raise the white flag and say they’ve moved from a position of asset sensitivity to liquidity sensitivity as our liquidity guideline,” said Bob Warnock, director at Curinos, a financial services research firm.
Banks with between $3 billion and $10 billion of assets have seen the sharpest rises in their loan-to-deposit ratios since last year, according to Curinos. Some banks have reported swings of between 15 and 25 percentage points over the past year.
Unity Bancorp in Clinton, New Jersey, currently has a loan-to-deposit ratio of 118%, up from 104% at the end of 2020. In an effort to attract more deposits, the $2.4 billion-asset bank opened a branch in Lakewood, New Jersey, late last year, and had plans to open two more branches in 2023.
Banks that want to boost their loan-to-deposit ratios by raising deposits will have to make certain sacrifices in the short term, Warnock said.
“It’s too late to play defense right now because it’s going to degrade your operating earnings and your equity,” Warnock said.
Consistent interest-rate hikes by the Federal Reserve have forced banks to boost the own rates they offer to depositors. The race for deposits at banks large and small heated up last summer, when banks — concerned they would lose depositors if they moved too slowly — began to meaningfully boost the rates they paid. Almost 20% of banks offered to pay savings rates of 2% or more last month, up from just 1% a year prior, according to Curinos data.
“Banks who were kind of asleep at focusing on those core accounts have had to wake up and be more proactive,” said Chris Marinac, director of research at Janney. “There are some banks that really focused on relationships, and they have to work harder to keep those relationships and pay them more, but they still have them.”
Deposits at U.S. commercial banks fell to $17.6 trillion this month, down from more than $18 trillion a year ago. Banks are facing deposit competition from securities such as Treasuries, which often offer higher returns than traditional bank accounts.
Bank executives expect loan demand to be weaker in 2023, but persistent inflation is helping to keep demand alive. When goods and services cost more, customers must take out larger balances to afford them. And those bigger loan balances can put more pressure on banks’ liquidity.
In recent years, bankers were often able to receive their full bonus by making more loans to old and new clients.
But this year, those who are hoping for a bigger payday will have to hone another skill: bringing in those clients’ deposits.
The shift is another sign of how banks are battling for deposits, thanks to the Federal Reserve raising interest rates sharply and putting an end to the days when the industry could stand by without paying much, or anything, to their depositors.
If deposit growth previously made up 10% of a loan officer’s bonus total, that figure is now at least 20%, said Mike Blanchard, CEO of the Atlanta-based Blanchard Consulting Group.
Oana – stock.adobe.com
With deposits now heading out the door at many banks, industry executives are revising their employees’ bonus targets. How well bankers do at bringing in deposits, as well as holding onto existing ones, is suddenly taking center stage.
Alan Johnson of Johnson Associates, which advises megabanks, regional banks and investment firms on compensation, noted that banks want the cheapest possible source of funds.
“That’s true for a giant bank or a community bank,” he said, adding that incentivizing deposit-gathering can help banks in this regard.
The picture has changed quickly from last year, when banks were awash in deposits that arrived earlier in the pandemic, and there was “more liquidity than anyone could possibly imagine,” Johnson said.
Loans remain a top priority for bankers’ incentive plans, since interest and fees from borrowers are banks’ primary way of making money, particularly at smaller institutions.
Deposit outflows concern banks because they increase the risk of a shortfall in the amount of liquidity needed to fund the loan volumes they are targeting.
Deposits have long been part of many bankers’ incentive plans, but they took a backseat for much of the pandemic as banks fought for any loan growth they could get.
Now, the deposits that banks use to fund loans are making up a larger share of bankers’ bonus targets, said Mike Blanchard, CEO of the Atlanta-based Blanchard Consulting Group, who focuses on community banks.
If deposit growth previously made up 10% of a loan officer’s bonus total, that figure is now at least 20%, Blanchard said. For retail branch managers, the already-heavy emphasis on deposits has escalated. And bank boards are also basing more of senior executives’ bonuses on their ability to bring in deposits.
“The focus this year is almost 100% on good, core deposit growth,” Blanchard said.
Bankers have been talking about the shift in recent weeks.
At the top of Ameris Bancorp’s priorities this year is “deposits, deposits, deposits,” CEO Palmer Proctor told analysts on an earnings call last month.
“All our incentive plans have been adjusted to reflect that across the board in a more intense level,” Proctor said, though he noted focusing on deposits is “nothing new” for the Atlanta-based bank.
At Dime Community Bancshares, CEO Kevin O’Connor said on a recent earnings call that incentive compensation plans “from top to bottom are designed on prioritizing” growth in demand deposits. Those funds do not pay interest, which helps to keep the Hauppauge, New York-based bank’s interest expenses down.
PacWest Bancorp is also tweaking its incentive-pay programs to prioritize deposits. Additionally, the Beverly Hills, California-based bank is making sure that the loans it makes generally come with a deposit relationship, executives said last month.
PacWest has always had teams focused specifically on deposits, but now it’s “not just one group,” said Chief Operating Officer Mark Yung. “It’s everybody, from the lenders to the top of the house all the way to the front line.”
Banks are not seeking just any deposits. They particularly want core deposits — the main deposit accounts for consumers and the accounts for businesses’ operational funds, which they use for payroll and other key expenses.
Those deposits are seen as far more “sticky” than non-operational deposits, which are a bigger flight risk as customers chase higher-yielding options elsewhere.
Those better-paying options include Treasury securities and higher rates on deposits — sometimes at online banks, but also at brick-and-mortar banks with higher rate specials posted on their windows.
Karen Butcher, managing director at the compensation consulting firm Pearl Meyer, said that banks are using metrics such as their clients’ average monthly balances to help judge employees’ performance.
“Retention is really as important as the acquisition,” Butcher said.
The focus on deposits is likely not new to bankers who specialize in commercial and industrial loans, the credit that banks extend to businesses for general purposes or specific projects. But those who focus on commercial real estate loans are increasingly seeing some sort of deposit-related requirement added to their incentive-pay plans, according to Butcher.
“I think we’re going to see more of looking to those lenders to say, ‘How can we get some deposits from your customers?’ whereas in the past that hasn’t been a focus,” Butcher said.
Looming over compensation decisions, however, is one of the biggest sales scandals in banking history.
One lesson from Wells Fargo’s fake-accounts scandal is that bank management should establish targets in a realistic way that don’t encourage “malfeasance,” said Blanchard, the Atlanta-based community bank consultant.
Wells continues to operate under an unprecedented asset cap after aggressive sales targets set by prior management prompted branch staffers to open unauthorized customer accounts.
Bankers should always have a board committee or similar structures to review incentive plans for anything that could put the bank at risk, Blanchard warned.
“They need to make sure they have good corporate governance, because you’ve got to be careful,” he said.
