It’s been nearly a month since the failures of Silicon Valley and Signature banks sent shockwaves through the global banking system. And while U.S. regulators moved quickly to prevent a domino effect from tearing through the banking sector, and both institutions are now under new ownership, many questions remain about what needs to change in order to avoid a repeat of the scenarios that led to the second and largest bank failures in U.S. history.
Just days after the failures, a new Deseret News/Hinckley Institute of Politics poll found a majority of Utahns were deeply concerned about the Silicon Valley Bank failure and many were closely monitoring the situation.
For now, the same agencies that collaborated to cover the billions in insured deposits at the failed banks, the Federal Reserve, U.S. Treasury and FDIC, are reporting that the U.S. banking industry is in stable and reliable stead. And all three are also engaged in various investigations of the failed banks.
While banking heads and industry watchers await likely changes in regulatory and oversight policy on the heels of the failures, widespread concern among individuals and businesses have fueled a wave of depositor flight by customers at smaller banks who’ve moved assets to larger institutions they consider “too big to fail.”
Jamie Dimon leads one of those islands of perceived fiscal safety as CEO of JP Morgan, the largest bank in the nation. In a Tuesday letter to stockholders, Dimon said there was plenty of blame to go around for Silicon Valley Bank’s failure and that the bank’s management poorly handled the bank’s interest rate risk by buying low-interest government bonds and mortgages, leaving it too exposed to the Federal Reserve’s rising interest rates, per The Associated Press. Regulators like the Fed did not adequately understand the risks in Silicon Valley Bank’s balance sheet soon enough to push the bank to adjust course before it was too late, Dimon said.
Dimon also noted the run on Silicon Valley Bank deposits, which ran north of $40 billion in a single day before the FDIC stepped in last month, was instigated by the very venture capital and tech sector clients that were most benefitted by the bank.
“The unknown risk was that SVB’s over 35,000 corporate clients — and activity within them — were controlled by a small number of venture capital companies and moved their deposits in lockstep,” Dimon wrote. “This is not to absolve bank management — it’s just to make clear that this wasn’t the finest hour for many players.”
Dimon also said that depositor migration from smaller to bigger banks did not represent a net positive outcome for anyone, noting the country benefits from the existence of smaller banks and community banks because they serve more local populations than their bigger rivals.
“While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd,” Dimon wrote, per the AP.
Dimon also noted in his letter that he expects new, heightened regulation will be among the outcomes of the federal inquiries into the bank failures and would like to see more stress tests that are guided by “real world” scenarios that can more accurately assess a bank’s fiscal health.
In the Deseret News/Hinckley Institute of Politics statewide poll conducted March 14-22, 55% of respondents said they were very closely or somewhat closely following the Silicon Valley Bank crisis as it unfolded, and 60% said they were concerned to some level about the crisis.
Survey results, gathered by Dan Jones and Associates, come with a margin of error of plus or minus 3.46%
Al Landon, assistant dean at the University of Utah’s David Eccles School of Business, reviewed the Deseret News poll results and said while he believes the U.S. banking sector is not on the verge of collapse, he does understand the nervousness the recent failures have incited in consumers.
“Overall I continue to believe that the industry is in strong shape and good condition,” Landon said. “But, it’s pretty understandable that when you have multiple, simultaneous shocks that some people would rightfully wonder if there are systemic problems.”
Landon said the quick response by regulatory and governmental agencies gave “a fair amount of confidence that we’re not at a calamity stage” but noted the events have spurred an appropriate increase in awareness, and scrutiny, of the unusual circumstances that precipitated the failures.
An unprecedented combination of circumstances that helped pull down Silicon Valley and Signature banks, which included a lethal combination of viral social media communications coupled with the speed of electronic funds transfer systems, created a scenario that would have been very hard for regulators to predict, Landon noted.
“Regulation, almost by necessity, is not fully anticipatory,” Landon said. “I think we could all imagine how challenging it is to envision something that no one has seen before.”
Landon said the Silicon Valley and Signature failures represent the outcomes of a “convergence of factors unique to our time,” and he expects regulators will land on an update to regulatory oversight that “calls for some different and innovative tools to make sure we’re adapting to the risk that’s out there.”
He also offered a simple piece of advice to consumers and business owners who may be harboring their own worries about assets under the care and management of banking institutions.
“Often times, we don’t think to go directly to our point of concern and that’s probably a useful discussion to have,” Landon said. “No banker wants their customers to suffer anxiety over their accounts or assets. If you’re concerned, you should absolutely talk to your banker.”