Despite High-Profile Failures, Local Exec Says Banking Industry Is Healthy
NEW ORLEANS — No doubt, there will be books and documentaries galore about last week’s Silicon Valley Bank and Signature Bank failures, which rank as the second and third worst in U.S. history. Right now, everyone just wants to know that it won’t be the start of a trend.
Chris Ferris, president of New Orleans-based Fidelity Bank, stresses the fact that 91% of the country’s banks are well-capitalized and not in danger of following SVB and Signature into troubled territory.
“The majority of the banking industry is much better diversified in terms of where they make their investments and who they bank,” he said. “So if one particular industry or segment has a hard time — like what’s happening in the tech world right now — it doesn’t spell problems for the bank as a whole.”
SVB, which controls more than $200 billion in assets, is known for supporting roughly half of the country’s venture-backed technology and life-sciences companies. The failure of Signature, which is about half that size, is being blamed on last year’s cryptocurrency collapse.
Ferris, who runs a community bank with about $1 billion in assets, said the banking system overall is as healthy as it’s been in many years and he believes that trend will continue. It’s only panic that can lead to a self-fulfilling prophecy.
“If enough people say there’s a problem, then people start to think, ‘Well, maybe there’s a problem,’” he said.
Interestingly, bank failures are more common than most people think. The Washington Post reports that there have been 565 of them in the U.S. since the new millennium. During the teens, there was an average of two failures per month.
Just how the SVB situation became so dire — despite the oversight of bank leadership and regulars — is a question that will be discussed on news shows ad infinitum, but the gist of what went wrong is this: During the pandemic, when there was a lot of cash flying around and interest rates were very low, deposits at the bank doubled. SVB needed to find somewhere to invest some of the funds, so it went with U.S. Treasury securities, those “ultra-safe” investments that also have a bad habit of losing value when interest rates spike.
Cue the interest rates hikes.
So far, the Fed has raised rates from 0.25 percent in March 2022 to 4.75 percent. That means the treasuries that SVB bought two years ago are underwater. As a result, the bank lost $1.8 billion on a recent sale of some of those securities, which was one factor that raised alarm bells for investors and led to last week’s bank run, which continued until the federal government took over.
“We all have investments where the price goes up and down, but when it becomes a bigger problem is when we see a bank like SVB with a higher risk loan portfolio,” said Ferris. “Money begins to come out of the banking system because of the fact that it’s more expensive to live and to run your business [because of inflation and higher rates]. So SVB got to a point where that liquidity was leaving and they couldn’t meet the demands of their depositors. … So they turned to an asset to sell. And that asset that they sold was those bonds at a billion dollar loss. And when you do that, people start to question what happened.”
Ferris said the federal government has helped stabilize the situation by telling SVB customers they will have access to their money starting today, and by opening a special window for banks that need access to more liquidity.
“That window allows banks to borrow from the Federal Reserve for a year,” he said. “And they can pledge their bond portfolio as collateral even if they have a significant loss in that portfolio. So if I have $100 worth of bonds, and they’re only worth $90, the Fed is going to still let me borrow, turn those bonds into cash at what’s called the par rate or the price that I paid for them.
“I believe those two moves should do a lot to help stem the panic that could come out of events like this.”