Like you, the team at Artisan Advisors is processing how a $200 billion bank with a $16 billion market cap on Wednesday can fail on Friday. SVB was followed by an unprecedented Sunday seizure of Signature Bank. Even more amazing, the FDIC closed both without buyers and billions of uninsured deposits at risk.
REGULATORS WERE SIGNALING
No one saw this coming… except maybe Artisan’s own Jeff Voss and Kathy Marinangel in this January 17,2023 article: Regulatory focus on unrealized losses makes liquidity planning key for banks | S&P Global Market Intelligence (spglobal.com) Here are two prescient quotes:
“The regulators have a valid concern, and they’re out there expressing it,” said Jeffrey Voss, founder and managing partner of Artisan Advisors, a consulting firm for community banks and credit unions. “They’re giving fair warning to banks: ‘Be prepared when we come in, we’re going to be looking at this. And if you’re not prepared, what we can do to you will actually just exacerbate the problem.'”
“If those restrictions (limiting the interest rate a bank can pay on deposits or limiting the bank’s capacity to bring in brokered deposits) are applied to a bank who’s not well capitalized, that makes it even harder to retain the liquidity that they need,” said Kathy Marinangel, a director at Artisan Advisors. “When that occurs, that exacerbates the problem.”
In SVB’s case, a failed equity raise to address liquidity and AOCI losses resulted in a run on the bank.
THE ARTISAN TEAM WEIGHS IN
Dave Larson had these key takeaways:
- Every bank board in the country will be (or should be) asking for a briefing on their investment portfolio/AOCI and liquidity plan.
- AOCI losses can limit a bank’s ability to raise liquidity without taking a charge to capital.
- Uninsured depositors were covered because the contagion posed “systemic risks.” How will other banks be treated this week or in the future?
- There is a long list of banks with negative or sub-par tangible common equity ratios when AOCI losses are included.
- Will the contagion from SVB (one of the top tech lenders) result in credit tightening?
- As Jeff and Kathy called it, the focus on capital and liquidity will be intense. Emergency liquidity lines are costly and pose reputational risk. Will the regulators revisit excluding AOCI in the regulatory capital requirements?
According to Peter Fotopoulos, one significant issue that exacerbated SVB’s problems was the level of uninsured deposits. On their 12/31/22 CALL report, they reported $162 billion in domestic deposits with $151 billion of uninsured deposits – or 93%. And Tommy FitzGibbon said that, obviously in the case of SVB, they had no options and not enough time to put a bid package together. But the FDIC should have known by the call report that there was trouble brewing. John Hecht added, “Banks need to assess whether they’re satisfied with their current contingent liquidity and stress testing. You can bet the regulators will be asking lots of questions of all banks, of any size, in their districts.”
Like everyone else, we’re watching the fallout from these failures very closely. And we’ll continue to provide updates and insights as we learn more. In the meantime, our team is here to help in any way you may need.