By Caroline Willard, CEO
The news of two bank failures has rocked the financial services and tech worlds. Over the weekend banking regulators closed two banks: the $209 billion Silicon Valley Bank (SVB) and the $110.4 billion Signature Bank in New York.
SVB’s collapse – the second largest bank failure in U.S. history – played out with an “It’s a Wonderful Life”-style bank run, leaving many to wonder “how could this have happened” and “what now?”
According to the FDIC, the failure is a result of uninsured deposits running off very quickly and “seriously mismatched investments.” Here’s a simplified breakdown of the events that led to SVB’s collapse:
In 2008, low interest rates sparked a venture capitalist boom. In response to the pandemic-era economic downturn, in 2020 the Federal Reserve purchased large quantities of U.S. government and mortgage-backed securities and cut its federal funds rate from .25% to 0%.
A zero-rate interest policy environment provided fertile ground for bank deposits to grow. Silicon Valley Bank’s startup customers were well-capitalized, loans were down, leaving the bank without that source of revenue. The bank purchased government securities, a fine way to earn money…if the interest rates remained at zero. In a now rising-rate environment, SVB was left with assets that were devaluing with each interest rate hike.
Interest rates rose, venture capitalists’ deposits slowed, startups started drawing down more of their money to pay for their expenses, and SVB had to come up with the cash to make that happen. In need of liquidity, SVB sold $21 billion of securities, resulting in an after-tax loss of $1.8 billion. Bond prices declined which meant SVB had unrealized gains on its balance sheets that turned into unrealized losses in the last three months.
Investors started pulling money out of SVB. In less than two days, SVB helplessly watched its liquidity evaporate, exacerbated by lightning-speed social media communication.
FDIC told Hill staff that SVB’s collapse was “extreme and dramatic at the very end.” The run was accelerating to the point of a chaotic situation at SVB’s branches, which is why SVB made the unusual decision to close midday Friday rather than the traditional COB.
With hopefully the most dramatic events behind us, the question on many minds is, “what now?”
It’s important to quell members’ concerns about the safety and soundness of their funds. The SVB and Signature Bank failures are related to bank mismanagement, not a system fracture. SVB’s unique business model was not as dependent on retail deposits as traditional financial institutions. The failures can be viewed as a reverberation of the tech sector’s current issues, accelerated by digitization, and amplified by collective angst caused by The Great Recession.
Credit unions and banks under $10 billion are going to receive more regulatory scrutiny on both liquidity and short-term investments. Large bank failures cause regulators to show the world they’re watching everything.
We took a quick scan of regional call reports and didn’t find any credit unions with anything approaching the percentage of uninsured deposits that was seen at SVB:
- 6 credit unions have a percentage of uninsured deposits of 40% or greater.
- 16 credit unions have a percentage of uninsured deposits of 20% or greater.
- 34 credit unions have a percentage of uninsured deposits of 15% or greater.
- 81 credit unions have a percentage of uninsured deposits of 10% or greater.
It’s also worth noting that the largest credit unions are required liquidity coverage of at least two times their asset size.
Liquidity concerns have been keeping many credit union leaders awake at night and this situation puts a spotlight on that very issue. It also strengthens the credit union argument to Congress for the Central Liquidity Facility to be updated.
The Credit Union National Association shared the following webpage, which contains social media graphics and talking points. CUNA members may customize the materials as they draft member statements. Some of the key talking points:
- Credit union deposits in federally insured credit unions are safe and secure.
- Federally insured credit unions offer a safe place for credit union members to save money. These deposits are protected by the National Credit Union Share Insurance Fund and insured up to at least $250,000 per individual depositor – the same as any other federally insured financial institution.
- Credit union members have never lost a penny of insured savings at a federally insured credit union.
- Visit MyCreditUnion.gov for more information about the National Credit Union Share Insurance Fund coverage for consumers.
- In addition to federal insurance, several states permit private deposit and excess deposit insurance. American Share Insurance has powered private primary deposit insurance for up $250,000 per member account since 1974 without experiencing a loss. Currently, American Share Insurance insures $2.2 billion from 1.3 million members.
See the following statement from NCUA Chairman Todd M. Harper:
“The credit union system remains well-capitalized and on a solid footing. The agency continues to monitor credit union performance through both the examination process and offsite monitoring, and it will continue to do so into the future.
Credit unions have access to a wide range of liquidity sources. The NCUA, along with its Central Liquidity Facility, is able to provide a back-up source of liquidity to member credit unions as needed.
The agency continues to coordinate with the other federal financial institution regulators to ensure the continued resiliency of the American financial services system.
As always, the NCUA is committed to the protection of credit union members and the safety and soundness of the credit union system overall. No one has ever lost a single penny of insured share deposits within the credit union system.”
Additional Resources Coming Soon
This is a developing story. We will keep you abreast of the impact to America’s credit unions and its members and share resources as they become available.