National Bank Headlines
We have received numerous calls over the last few days regarding the short-term and the possibility of downstream effects of the Silicon Valley Bank and Signature Bank failures, as well as the renewed concern for Credit Suisse's stability.
First and foremost, we have contacted our larger local banks and we feel confident they remain exceptionally well capitalized. Besides their statements indicating such, proof of this can be seen in their CD rates. Bank CD rates are a function of different market metrics, but primarily bank deposit needs. Banks are willing to pay you more for your deposits or CDs if they have larger loans to cover. You have probably noticed our local banks have CD rates significantly lower than other areas of the country. This is a good indication they don't need additional deposits. Our local banks largely run very conservative operations and have done so for decades.
The two or three banks in the headlines operated much more aggressively. SVB, for example, catered to tech and cryptocurrency startups and venture capital firms which, by their very nature, require regular cash infusions to stay afloat. Additionally, SVB had some "less than appropriate" investment strategies for their business model. Their clients had heavy short-term cash needs, but the bank's investment officer purchased "safe," but long-term Treasury bonds. Those Treasury bonds paying maybe a 2% coupon went down in value 15%-20% due to Fed rate hikes. When SVB was unable to raise additional capital, it was forced to sell the Treasury bonds in its portfolio at a large haircut. Then, nervous clients began withdrawing all of their funds which started the bank run. And as the saying goes, "that was all she wrote".
Items of note from industry analysts: JP Morgan said, "Bottom line: SIVB carved out a distinct and riskier niche than other banks, setting itself up for large potential capital shortfalls in case of rising interest rates, deposit outflows and forced asset sales". According to Fortune, SIVB’s Chief Risk Officer left in April 2022 and was not replaced for 8 months. From our perspective, the oversight, compliance, and investment strategies for this bank were a big bowl of failure soup waiting to boil over. In the below article, a former Board member of the Oklahoma City Federal Reserve reiterates these points.
We are monitoring the situation closely and have examined Charles Schwab's potential exposure. While any bank failures are disconcerting, we don't believe Schwab or our local Oklahoma banks are at risk from a domino or contagion effect. The banking sector has seen this event negatively affect stock prices this week and there is a possibility of additional strain on other, less capitalized banks. However, the majority of banks we all deal with continue to prosper from their conservative strategies.
As always, feel free to contact us if you have additional questions.