Regional banks are seeing flight of deposits to too-big-to-fail megabanks


The unexpected demise of Signature Bank over the weekend, along with the failure of Silicon Valley Bank on Friday, ignited a shoot-first-ask-questions-later reaction among regional-bank investors as customers moved deposits to the largest U.S. banks for perceived safekeeping, observers said Monday.

Stocks of regional banks such as First Republic Bank
Western Alliance Bancorp
PacWest Bancorp
and Zions Bancorp
dropped Monday even after U.S. bank regulators set up a new emergency-loan program as a backstop for deposits.

Over the weekend, crypto-friendly Signature Bank
was closed by regulators, even though only a minority of its deposits were tied to digital currency. The company was hit hard despite the fact that it derives most of its business from traditional commercial banking services to companies outside the world of startups and digital currencies.

“Investors are scared by a flight of deposits to the too-big-to-fail banks,” Janney Montgomery Scott bank analyst Christopher Marinac told MarketWatch. “It’s a perception problem that’s become a perception crisis.”

Even though the Federal Reserve announced a new backstop program and President Joe Biden declared U.S. banks safe, investors remain skeptical about the fixes in place for the banking system — or they simply haven’t taken the time to absorb the moves by regulators to calm investors, Marinac said.

“There’s a disbelief out there that the there are no more failures coming,” he said.

Monday remains critical for both bank stocks and bank deposits, he said, adding that if banks survive the selloff and the run on their deposits, the market should stabilize within the next couple of days.

Looking ahead, Marinac expects the Federal Deposit Insurance Corp. to find buyers for both Silicon Valley Bank and Signature Bank.

“This should alleviate the risk of deposit runs, although we do not know if this eliminates the customer panic,” Marinac said in a research note published Monday. “Most important, banks’ capital levels are strong and credit quality issues are limited, with healthy reserves in place for future credit losses.”

During the financial crisis, the federal government established six U.S. banks as systematically important financial institutions, or SIFIs: JPMorgan Chase & Co.
Bank of America Corp.
Wells Fargo & Co.
Citigroup Inc.
Goldman Sachs Group Inc.
and Morgan Stanley

Those banks are currently in the spotlight as havens for deposits.

Meanwhile, Gerry Granovsky, a former senior vice president at Moody’s, said Silicon Valley Bank’s problems stemmed partly from a lack of diversity in its deposits.

The bank’s clients from the venture-capital community would routinely recommend the bank’s services to their portfolio companies, which made the bank’s deposits too dependent on risky startups, observers have said.

Silicon Valley’s risk-management committee should also have flagged management’s heavy exposure to long-dated securities, instead of having more medium- or short-term securities that it could sell without incurring big losses.

This loss in value prompted the bank to announce a need to raise more capital, which in turn sparked a run on deposits at the bank.

“This was a failure by the bank’s risk-management committee,” Granovsky said. “SVB is not a traditional bank. They had a very high concentration of customers who were brought in by the venture capitalists. … In reality, left to their own devices, start-up companies would have picked many other banks to host their accounts.”

Also read: What should you do if your bank closes down? People have questions after Silicon Valley Bank collapse.




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