One week after the collapse of Silicon Valley Bank — the nation’s 16th largest, and home to significant deposits by technology firms — monetary experts, banking regulators and investors continue to sort out implications for the overall economy.
The SVB closure prompted immediate unease and some fallout, with the bank’s collapse prompting investors to withdraw uninsured funds from New York-based Signature Bank. The situation resulted in that bank’s shutdown as customers withdrew over $10 billion or about 12 percent of Signature Bank’s assets.
The federal government stepped in to ensure that all depositors had access to their funds, even if they had more than the $250,000 guaranteed by the Federal Deposit Insurance Corp. The backstop funding came from bank fees paid to the FDIC, Treasury Secretary Janet Yellen said Thursday in Senate testimony.
Then, customers at First Republic Bank, also based near Silicon Valley, started to make rapid withdrawals. The rush prompted a $30 billion capital infusion from the nation’s largest banks to prevent collapse, though the bank was still struggling on Friday.
Meanwhile, international lender Credit Suisse in Switzerland faltered this week, too, but so far staved off closure through a $54 billion lifeline from the Swiss central bank, though Reuters reported on Friday that the lender’s stability remains fragile.
The SVB situation was unusual, University of Michigan finance professor Amiyatosh Purnanandam said this week in a statement.
The bank bet that interest rates would remain low for a longer period of time as it bought bonds, but “as the Fed began to increase interest rates, that bet failed,” he said.
As the bank’s assets declined, its customers — many Silicon Valley tech firms suffering a stock market value rout — started to withdraw deposits, and the bank was forced to sell the bonds at a loss.
“The double whammy of asset decline and deposit withdrawal was sufficient to bring the bank down,” Purnanandam said.
Here are five things for Michiganders to know as fallout from SVB and other banks continues into their second week:
Moody’s Investors Service said Monday, as regulators and federal officials dealt with the bank closures, that six regional banks face possible downgrading of their rating. That risk rating can be used by investors as an indicator of the soundness of a financial institution.
Among the six is Comerica Bank, which moved its headquarters from Michigan to Texas in 2007. The bank remains Michigan’s third-largest by deposits, behind JP Morgan Chase and Huntington.
It had 188 offices in Michigan as of the FDIC’s most recent market share report, and $37.7 billion in deposits.
The issue at Comerica, Moody’s said, was its “high reliance on more confidence-sensitive uninsured deposit funding,” along with unrealized losses in bonds — which make up 38.5 percent of its core capital — and relatively low capitalization.
However, Moody’s added, Comerica’s recent profitability has been solid, due to higher interest rates. Further, it said, weaknesses in the bank’s funding and liquidity are “somewhat offset by its conservative credit culture. This has resulted in strong asset quality performance through cycles.”
The bank also believes there is no valid comparison between Comerica and the recently closed banks, spokesperson Matt Barnhardt said in a statement this week.
“Comerica looks forward to engaging with Moody’s during this review to better understand their concerns around uninsured deposits,” he said.
”Our proven, conservative business model includes commercial banking, retail, and wealth management,” Barnhardt said, leading to what he called strong industry and geographic diversification.
“In short,” he said, “it is business as usual at Comerica.”
Bank stocks declined Friday morning along with the overall market, though their five-day decline shows that investors seem to be reacting to the daily news about financial institutions, including the news on Thursday that Credit Suisse faltered.
The Dow Jones U.S. Bank Index swung from a high on Tuesday of $420.18 to $384.04 on Friday morning, a 9-percent difference with waves of peaks and valleys in between. Friday morning’s drop reached about 4 percent.
In comparison, the Dow Jones Industrial Average hit its five-day low on Wednesday morning, when it fell to 31,464 — in between five-day highs on both Tuesday and Thursday. While it also traded down on Friday morning, the difference between the week’s high and low was under 3 percent.
Some Michigan-based members of the state’s life science businesses banked with SVB, said Stephen Rapundalo, CEO of MichBio, an industry organization, in a letter to his members.
“The failure of Silicon Valley Bank (SVB) Friday has been a major shock to life sciences companies and the whole ecosystem in Michigan and across the United States,” Rapundalo wrote. “We know a number of MichBio’s member companies are directly affected by this concerning situation.”
However, it’s unclear how many. Rapundalo would not comment further when contacted by Bridge. As immediate payroll and possible overdraft issues were resolved by other life sciences companies and tech companies across the U.S. that banked with SVB, they have been moving to new banks, in some cases multiple banks to diversify. Among them, The Detroit News reported, was May Mobility of Ann Arbor.
Business groups in the state are not seeing significant effects, they said. However, the Grand Rapids Area Chamber of Commerce is setting up a town hall meeting for its members to address questions from the bank fall out and the broader economy.
Andy Johnston, vice president for public affairs, said the program is likely going to take place next week and focus on banking stability and what it means for the business community.
The state of the economy “remains extremely challenging to interpret amid conflicting signals,” according to U-M economists in their U.S. forecast released in February.
Strong job growth numbers and positive growth in the first half of the year will precede a slowdown in momentum, only to return in 2024.
However, at the same time, The Fed “still has more work to do on inflation,” the economists said, even as it starts to cool. That could mean higher interest rates, leading to what the U-M experts say could be a mild recession.
So far, even as experts question what the Fed will do next with interest rates, the forecast isn’t changing, said Daniil Manaenkov, one of U-M’s forecasters.
“I'm not seeing much in terms of actual financial stress to revise the odds of a recession,” he told Bridge on Friday.
Further, he said, “some banking stress was not really that unexpected,” in part because of the mild recession in the forecast.
The Fed signaled in a March 3 report that ongoing interest rate increases are likely, so that monetary policy is “sufficiently restrictive to return inflation to 2 percent.”
While increases to the federal funds rate — which is the rate banks charge each other, in turn influencing consumer rates — slowed in December and January, the jobs market remains tight. In fact, the number of people filing for jobless benefits last week fell 9 percent, instead of the expected gain of 0.8 percent.
The Fed in January raised the federal funds rate by 0.25 percent, the first increase of 2023 following seven during last year. The latest increase brought the rate to about 4.65 percent, the highest since fall 2007.
This month, many expected a 0.5 percent increase until Chairman Jerome Powell spoke after the banks collapsed, signaling a potential pause to let markets cool.
However, now a majority of economists say a 0.25 percent rate hike is likely, according to Reuters. That would be close to the U-M forecasts of 5.0 to 5.25 this spring.
A hike could keep increasing rates for mortgages, auto loans and credit card debt. While U.S. auto sales are rebounding from the recession to an annualized rate of 15.7 million, roughly 12 percent higher than 2022’s total, sales of existing homes in the U.S. plummeted 44 percent from January 2022 through this year. The decline is due in part to the impact of higher rates (around 6.3 percent for a 30-year loan), along with persistently higher prices.
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