2023 United States banking crisis

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2023 United States banking crisis
Signature bank storefront (39th & Madison) reporters swarming.png
Reporters swarming outside Signature Bank in New York, March 13, 2023
Background
Events
Related groups
Effects

The 2023 United States banking crisis saw multiple bank failures and bankruptcies, prompting government intervention. In March, three mid-sized U.S. banks failed, leading to a global drop in bank stock prices and regulatory actions to prevent global contagion. Silicon Valley Bank (SVB) failed after selling its Treasury bond portfolio at a loss, triggering a bank run due to liquidity concerns. The bonds had lost value as market interest rates rose, and the bank's mainly tech and wealthy clients had deposits exceeding FDIC insurance limits. Silvergate Bank and Signature Bank, both with cryptocurrency exposure, also failed amid market turbulence.

In response, U.S. regulators ensured that all deposits at SVB and Signature Bank were honored,[1] and the Federal Reserve established the Bank Term Funding Program (BTFP) for loans to eligible banks.[2][3] Global regulators, including the Federal Reserve, intervened to provide extraordinary liquidity.[4][5][6]

By March 16, significant interbank funds transfers were underway, with some analysts predicting a broader U.S. banking crisis.[7] The Federal Reserve discount window saw $150 billion in borrowing by March 16.[8]

Following the SVB bank run, depositors began withdrawing cash from First Republic Bank (FRB), which also had significant uninsured deposits. Despite a $30 billion infusion from major banks, FRB's instability persisted, leading to its takeover by the FDIC and subsequent sale to JPMorgan Chase on May 1.[9][10][11][12]

Background

Further information: Cryptocurrency bubble § 2020–2022 cryptocurrency bubble, and 2021–2023 inflation surge
Normal yield curve began inverting in July 2022, causing short-term Treasury rates to exceed long-term rates
M2 monthly money supply changes. Money supply dropped by $-224.5 billion in March 2023. The largest drop on record since 1959.

In early 2023, several U.S. banks faced failures and bankruptcies, prompting government intervention. These failures were largely due to declining bond prices from rising interest rates and exposure to cryptocurrency. Many banks had invested reserves in U.S. Treasury securities which lost value as the Federal Reserve raised interest rates in 2022 to combat inflation, causing unrealized losses. To maintain liquidity, Silicon Valley Bank sold bonds at a steep loss, leading to its collapse after a bank run.[7]

The 2020–2022 cryptocurrency bubble also impacted banks with cryptocurrency exposure. Silvergate Bank announced its wind down on March 8, 2023, followed by a bank run at Silicon Valley Bank on March 10, and closure of Signature Bank on March 12 due to systemic risk.[13][14]

These failures were among the largest in U.S. history, with the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank.[15]

The Federal Reserve's 2019 "Tailoring rules" increased the minimum asset threshold for stress tests, allowing banks with assets under $100 billion, like Signature Bank and First Republic Bank, to have reduced liquidity standards.[16][17] Some questioned whether stricter regulation could have prevented the crisis.[18]

Liquidation of Silvergate Bank

Further information: Silvergate Bank § Liquidation

Silvergate Bank started in 1988 as a savings and loan association in California, later shifting to serve the cryptocurrency market in the 2010s. By 2017, it had $1.9 billion in assets, primarily from cryptocurrency firms.[19] By late 2022, 90% of its deposits were cryptocurrency-related.[20] Silvergate operated the Silvergate Exchange Network (SEN) to resolve and settle transactions in real-time for its clients, enabling quick, intra-bank transfers in U.S. dollars without needing traditional wire transfers.[19]

Despite its focus on cryptocurrency, Silvergate's investment portfolio included conservative assets like mortgage-backed securities and U.S. bonds. As interest rates rose during the 2021–2023 inflation surge, the value of these securities decreased. These unrealized losses became significant risks when Silvergate had to sell the securities at lower market values to meet liquidity demands.[21]

Silvergate Bank faced a bank run after the bankruptcy of FTX, with clients withdrawing $8 billion, leading to steep losses from asset sales. The bank reported a $718 million loss in Q4 2022.[22] Despite having assets of $4.6 billion in cash and $5.6 billion in liquid debt securities, Silvergate faced liquidity issues and borrowed $3.6 billion from the Federal Home Loan Bank of San Francisco.[23] On March 1, Silvergate indicated risks to its ability to continue operating.[13][24]

On March 8, Silvergate announced its voluntary liquidation and return of all deposits.[13][14][21] Signature Bank and First Republic Bank also failed due to similar issues with liquidity and market exposure.[14][9][10]

Collapse of Silicon Valley Bank

Main article: Collapse of Silicon Valley Bank

Silicon Valley Bank (SVB) was a commercial bank founded in 1983 and headquartered in Santa Clara, California. Until its collapse, SVB was the 16th largest bank in the United States and was heavily skewed toward serving companies and individuals from the technology industry.[25][26][27] Nearly half of U.S. venture capital-backed healthcare and technology companies were financed by SVB.[28] Companies such as Airbnb, Cisco, Fitbit, Pinterest, and Block, Inc. have been clients of the bank.[29] In addition to financing venture-backed companies, SVB was well known as a source of private banking, personal credit lines, and mortgages to tech entrepreneurs.[30] According to the FDIC, it had $209 billion in assets at the end of 2022.[31]

Silicon Valley Bank recorded an increase of its deposit holdings during the COVID-19 pandemic, when the tech sector experienced a period of growth. In 2021, it purchased long-term Treasury bonds to capitalize on the increased deposits. However, the current market value of these bonds decreased as the Federal Reserve raised interest rates to curb the 2021–2023 inflation surge.[32] Higher interest rates also raised borrowing costs throughout the economy and some Silicon Valley Bank clients started pulling money out to meet their liquidity needs.[33]

Collapse of Signature Bank

Further information: Signature Bank § Collapse
Signature Bank stock price (2006–2023)

Signature Bank was a New York City-based bank founded in 2001.[34] The bank began as a subsidiary of Bank Hapoalim that took on clients with assets of around $250,000, lending to small businesses based in New York City and in the surrounding metropolitan area.[35] The bank provided financing within the multifamily residential rental housing market in the New York metropolitan area beginning in 2007,[36][37] though it began to reduce its exposure to the market during the 2010s.[38] By 2019, just over four-tenths of the value of the bank's loans were made to multifamily homeowners in the New York metropolitan area, comprising $15.8 billion of the bank's then-$38.9 billion in net loans.[38][39]

Beginning in 2018, Signature Bank began to court customers in the cryptocurrency industry, securing hires that were experienced in the area with the goal of moving away from its dependence on real estate lending.[40] The quantity of deposits held at the bank expanded significantly, with deposits increasing from about $36.3 billion at the end of the 2018 fiscal year to $104 billion by August 2022; that month, over one-quarter of the bank's deposits held were those of cryptocurrency companies.[39][40] Its cryptocurrency-sector clients included large cryptocurrency exchange operators, such as Celsius Network and Binance.[14][40] By early 2023, Signature Bank had become the second largest provider of banking services to the cryptocurrency industry—second only to Silvergate Bank.[41]

In addition to providing traditional banking services to cryptocurrency clients, Signature Bank opened a proprietary payment network for use among its cryptocurrency clients. The payment network, Signet, had opened in 2019 for approved clients, and allowed the real-time gross settlement of fund transfers through the blockchain without third parties or transaction fees. By the conclusion of 2020, Signature Bank had 740 clients using Signet.[42][43] The network continued to expand during the following years; both Coinbase and the TrueUSD dollar-pegged stablecoin had become integrated with Signet in 2022 and 2021, respectively.[44]

Collapse of First Republic Bank

Further information: First Republic Bank § Collapse
First Republic Bank Stock Price

First Republic Bank (FRB) was based in San Francisco as a commercial bank and provider of wealth management services. It catered to high-net-worth individuals and operated 93 offices in 11 states, primarily in New York, California, Massachusetts, and Florida.[17] It was the 14th largest U.S. bank at the end of 2022.[45] On the morning of May 1, the California Department of Financial Protection and Innovation announced that FRB had been closed, and its assets were sold to JPMorgan for $10.6 billion.[46]

Aftermath

Federal response

The following represents federal responses to the banking crisis from early March 2023 to January 2024.

Bank Term Funding Program

In response to the bank failures of March, the government took extraordinary measures to mitigate fallout across the banking sector.[14] On March 12, Federal Reserve created the Bank Term Funding Program (BTFP), an emergency lending program providing loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions that pledge U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.[2][3][47] The program is designed to provide liquidity to financial institutions, following the collapse of Silicon Valley Bank and other bank failures, and to reduce the risks associated with current unrealized losses in the U.S. banking system that totaled over $600 billion at the time of the program's launch.[48] Funded through the Deposit Insurance Fund,[49] the program offers loans of up to one year to eligible borrowers who pledge as collateral certain types of securities including U.S. Treasuries, agency debt, and mortgage-backed securities.[50] The collateral will be valued at par instead of open-market value, so a bank can borrow on asset values that have not been impaired by a series of interest rate hikes since 2022. The Federal Reserve also eased conditions at its discount window. The Department of the Treasury said it would make available up to $25 billion from its Exchange Stabilization Fund as a backstop for the program.[51]

In January 2024, the Federal Reserve said it would let the program expire on March 11, as scheduled, also raising the interest rate on new BTFP loans. It also said loans outstanding in the program as of January 17 were $161.5 billion.[52]

In addition to working with their counterparts at the FDIC and U.S. Treasury to provide liquidity to banks through the BTFP, the Federal Reserve has begun to internally discuss implementing stricter capital reserve and liquidity requirements for banks with between $100 billion and $250 billion in assets on their balance sheets.[53] A review of regulations affecting regional banks has been ongoing since 2022, as Federal Reserve vice chairman Michael Barr and other officials in the Biden Administration had become increasingly concerned about the risk posed to the financial system by the rapidly increasing size of regional banks.[53][54]

U.S. investigations

The collapse of Silicon Valley Bank itself also spurred federal investigations from the U.S. Securities and Exchange Commission as well as the United States Department of Justice. Within the scope of both probes is the sales of stock made by senior officers of Silicon Valley Bank shortly before the bank failed, while the SEC's investigation also includes a review of past financial-related and other risk-related disclosures made by Silicon Valley Bank to evaluate their accuracy and completeness.[55]

Internal investigations at the FDIC and Federal Reserve noted that deregulation, not subjecting medium-sized banks to high scrutiny, reduced enforcement of remaining regulations, and government staffing shortages weakened oversight and allowed mismanagement of banks to cause their collapse.[56]

Economic impact

As depositors began to move money en masse from smaller banks to larger banks,[14][57] on Monday, March 13, shares of regional banks fell.[58]

PacWest Bank stock price
Western Alliance Bancorporation
stock price
Citizens Business Bank (CVBF)
Stock Price
Pacific Premier Bancorp (PPBI) stock price
Bank of Hope (HOPE) Stock Price
Valley Bank (VLY) Stock Price
Bitcoin price

Following SVB and Signature's collapses, Western Alliance Bancorporation share price fell 47% and PacWest Bancorp was down 21% recovering after their trading was halted.[59][60] Moody's downgraded its outlook on the U.S. banking system to negative, citing what it described as "rapid deterioration" of the sector's financial footing.[61] It also downgraded the credit ratings of several regional banks, including Western Alliance, First Republic, Intrust Bank, Comerica, UMB Financial Corporation, and Zions Bancorporation.[62] Large declines in regional bank stocks continued after First Republic's failure.[63]

U.S. President Joe Biden made a statement about the first three bank failures on March 13, and asserted that government intervention was not a bailout and that the banking system was stable.[64][65]

The initial bank failures led to speculation on March 13 that the Federal Reserve could pause or halt rate hikes.[66] Beginning on March 13, traders began modifying their strategies in the expectation that fewer hikes than previously expected would occur.[67] Some financial experts suggested that the BTFP, combined with a recent practice of finding buyers who would cover all deposits, may have effectively removed the FDIC's $250,000 deposit insurance limit.[68] However, Treasury Secretary Janet Yellen clarified that any guarantee beyond that limit would need the approval of the Biden administration and Federal regulators.[69]

The initial three bank failures and resulting pressures on other U.S. regional banks were expected to reduce available financing in the commercial real estate market and further slow commercial property development.[70] The Federal Reserve's discount window liquidity facility saw around $150 billion in borrowing from various banks by March 16,[8] more than 12 times the $12 billion that the BTFP provided.[71] Since the majority of First Republic's long term assets were in municipal bonds, it was unable to make full use of the BTFP as those assets did not qualify as an eligible collateral.[72]

By March 16, large inter-bank flows of funds were occurring to shore up bank balance sheets and numerous analysts were reporting on a more general U.S. banking crisis. Many banks had invested their reserves in U.S. Treasury securities, which had been paying low interest rates. As the Federal Reserve began raising rates in 2022, bond prices declined decreasing the market value of bank capital reserves, leading some banks to sell the bonds at steep losses as yields on new bonds were much higher.[7]

On March 17, President Joe Biden stated that the banking crisis had calmed down,[73] while the New York Times said that the March banking crisis was hanging over the economy and had rekindled fear of recession as business borrowing would become more difficult as many regional and community banks would have to reduce lending.[74][75]

Late on Sunday, the Federal Reserve and several other central banks announced significant USD liquidity measures in order to calm market turmoil.[76] In a "coordinated action to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements", the U.S. Federal Reserve, the Bank of Canada, Bank of Japan, European Central Bank, and Swiss National Bank joined together to organize daily U.S. dollar swap operations. These swaps had previously been set up to occur on a weekly cadence.[77]

The share price of PacWest had fallen sharply on 3 May after the bank announced that it was 'considering strategic options including a sale'. On 4 May share trading was suspended as the sell-off marked a further 42% loss with other US regional banks, including First Horizon, Metropolitan Bank and Western Alliance, also being affected.[78][79]

In May 2023, FDIC proposed imposing higher fees on an estimated 113 of the largest banks to cover the costs of bailing out uninsured depositors.[80]

International impact

By 19 March, concerns about the banking sector internationally had increased.[4][5][6][81][82] That day, Swiss bank UBS Group AG bought its smaller competitor Credit Suisse in an emergency arrangement brokered by the Swiss government. One month before the events in the United States, Credit Suisse had announced its largest annual loss since the 2008 financial crisis, as clients continued withdrawing their cash at a rapid pace; $147 billion had been withdrawn in the fourth quarter of 2022. It also disclosed it had found "material weaknesses" in its financial reporting. Its largest investor, Saudi National Bank, announced on March 15 that it would not provide more support to Credit Suisse. Its share price plunged 25% on the news and UBS stepped in to buy the bank. Axel Lehmann, former chairman of the bank, later sought to blame the American bank failures for triggering Credit Suisse's demise, though other analysts disputed that characterization. The bank had experienced many years of multi-billion dollar losses, scandals, executive turnover and weak business strategy.[83]

Late on Sunday the Federal Reserve and several other central banks announced significant USD liquidity measures in order to calm market turmoil.[81] In a "coordinated action to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements", the U.S. Federal Reserve, the Bank of Canada, Bank of Japan, European Central Bank (ECB) and Swiss National Bank joined together to organize daily U.S. dollar swap operations. These swaps had previously been set up to occur on a weekly cadence.[77]

On 21 March, The Business Times reported that Asian central banks were "unlikely to be greatly influenced by the banking crisis in the United States and Europe",[84] but Australia's central bank governors met and publicly indicated a potential pause in recent rate hikes. ABC News reported that the challenge for central banks is determining if the "banking turmoil close to crashing the real economy, or is inflation still the greater threat."[85] In Japan the three main lenders, Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group, lost share value between 10% and 12% due to the market turmoil and their exposure to the bond market.[86] Japan's central bank held a crisis meeting in mid-March while the Topix banks index fell 17%. The fall was led by fears over the SVB collapse and the risks in Japan's regional banking sector, partly because of exposure to US interest rate hikes.[87]

The cost to insure against default on Deutsche Bank debt rose substantially on Friday, 24 March, with the 5-year CDS for the bank's debt rising 70%.[88] The ECB and other European central banks raised interest rates the same day.[89] The European STOXX 600 index fell around 4% with shares in Deutsche Bank down more than 14% at one point, closing the day at a loss of around 8%.[90] The UK's banking index also fell around 3% led by falls of around 6% for both Barclays and Standard Chartered and a 4% drop for NatWest. Shares in other European banks also fell, among them Commerzbank, Austria's Raiffeisen Bank and the French Société Générale.[91][92][93] According to the European Commission's Paolo Gentiloni, finance ministers in the Euro zone called on the Commission to close loopholes in Crisis Management and Deposit Insurance (CMDI) provision, starting in the second quarter of 2023.[94]

Chinese banks experienced little negative effect. According to Bloomberg News, almost all of the 166 top performers during the market turmoil were in China. The banking crisis in the U.S. and Europe highlighted the relative stability of the Chinese banking system. While China's recovery from the pandemic remains fragile, inflation there is muted, and the People's Bank of China had adjusted interest rates at a slower pace than Western central banks.[95]

The turbulence in the financial system caused India's central bank to put any further hikes in interest rate on hold on 6 April, with governor Shaktikanta Das saying "it's a pause not a pivot". A 25 basis point increase had been widely expected. Central banks in Australia, Canada and Indonesia also paused any further increases.[96]

While rising interest rates give banks greater returns on customer's loans, the tighter financial conditions meant the sector saw a downturn in equity funding, with the S&P 500 bank index (SPXBK) in April down 14% year to date on expectation of lower quarterly earnings for some US banks.[97] Effects on the secondary market were also expected.[98] On 11 April the International Monetary Fund downgraded its forecast for GDP growth globally in 2023 from 2.9% to 2.8%, saying "Uncertainty is high and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled". The forecast marked a slowdown from 3.4% in 2022, but predicted growth could rise modestly to 3.0% in 2024.[99] The IMF had been cutting its forecast since spring 2022.[100][101]

See also

References

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