A digital bank run

As in anything digital, it happened fast. Once depositors of Silicon Valley Bank, a top 20 US bank, realized through social media that their bank was in trouble, a digital bank run happened. There was no angry crowd of depositors at the doorsteps of the bank offices. But there was a rush of depositors trying to move their money out through electronic means.

It is not just SVB. New York’s Signature Bank, another favorite bank of the tech sector, also got into trouble. US bank regulators had to spring into action quickly over the weekend to prevent a wildfire of confidence loss in the banking system. The 24/7 digital world means the run didn’t pause during the weekend.

Regulators said the customers of the failed banks would regain access to all their deposits starting Monday. All depositors, including those whose funds exceed the maximum government-insured level, would be made whole, according to a joint statement by US Treasury Secretary Janet Yellen, Fed Chair Jerome Powell, and Federal Deposit Insurance Corp. chair Martin Gruenberg last Sunday evening.

SVB’s collapse is the largest US bank failure since 2008. Their clients, specially the startups, were worried about their ability to pay their staff. The FDIC only protects deposits of up to $250,000. Some 89 percent of SVB’s $175 billion in deposits were uninsured as of the end of 2022, according to the FDIC.

Why did this happen? The immediate trigger was SVB’s announcement that it had sold a bunch of long-term US Treasuries at a $2 billion loss and would raise $2.25 billion in new shares to make up for it. That was a clear indication the bank was in trouble. It caused its depositors to run to their computers to move their money.

The bank held billions of dollars’ worth of Treasuries and other bonds, which are considered safe investments. Problem was, the bank used short term deposits to invest in long term US Treasuries. When interest rates started to go up, the mark-to-market value of the treasuries declined.

(Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will prefer newer bonds with higher interest rates so existing fixed-rate bonds must sell at a discount to compete. The redemption value of the bond at maturity remains the same, so in that sense, government securities are safe. But SVB had to sell at a loss because it needed cash right away to service withdrawals.)

Washington Post reports: “Its customers were largely startups and other tech-centric companies that needed more cash over the past year, so they began withdrawing their deposits. That forced the bank to sell a chunk of its bonds at a steep loss, and the pace of those withdrawals accelerated as word spread, effectively rendering Silicon Valley Bank insolvent.”

A Wall Street Journal commentary noted: “Everyone, except SVB management it seems, knew interest rates were heading up. Federal Reserve chairman Jerome Powell has been shouting this from the mountain tops. Yet SVB froze and kept business as usual, borrowing short-term from depositors and lending long-term, without any interest-rate hedging.”

And SVB didn’t have a chief risk officer for eight months. This is probably an important learning from this event. Know and respect your risks.

What is the impact of these US bank closures on the Philippines? Offhand, none.

The Bankers Association of the Philippines (BAP) has reassured that the US bank failures would not have any “material impact” on Philippine banks. “Banks have diversified deposit bases that include all sectors of the Philippine economy, allowing them to continuously provide the liquidity needs of their clients,” the BAP statement said.

SVB was, in comparison, concentrated on the tech sector. SVB also helped convince the Trump administration and a bipartisan group of legislators to drop some of the measures adopted to prevent events that led to the 2008 financial crisis. SVB maintained then that they are not too big to fail and, therefore, do not pose a systemic risk. But then, as we saw now, their tech customers can’t afford SVB to fail.

“Additionally, banks in the Philippines continue to have capital and liquidity ratios that exceed the requirements set by the Bangko Sentral ng Pilipinas,” the BAP added. Stress tests are regularly conducted to assure banks can meet safety requirements.

The BAP also pointed out, “The prudential measures implemented by the BSP provide the necessary support that allows the Philippine banking system to withstand economic shocks.”

Bank emergencies emphasize the need for a bank regulator with enough resources to quickly deal with any eventuality. For us, that includes making sure the BSP is adequately capitalized.

We may face other types of emergencies like the one we had in 1983 after it was revealed that the old Central Bank had overstated our forex holdings. The loss of confidence forced a new CB Governor to introduce the Jobo bills, which paid as much as 40 percent, to stem the tide of capital flight.

Or the BSP may need enough ammunition to defend the peso from speculators out to destabilize it.

My friends say these developments prove their point that the current Marcos administration should keep their hands off BSP in funding Maharlika.

One of them wrote in our Viber group: “I pointed out about the time of the Senate hearings in January on the Maharlika fund that a statement that the BSP ‘balance sheet was sound’ was misleading.”

“The latest BSP balance published as of August 2022 shows a P141.9 billion MTM (mark-to-market) negative in the equity, reflecting unrealized losses from HTM (hold-to-maturity) holdings charged straight to equity. (Losses on AFS holdings are reflected in the P&L). Leaving the BSP with P 128 billion or a LITTLE MORE THAN HALF OF THE TARGET P200 billion equity. This MTM negative will grow even bigger as the Fed ratchets up interest rates in the next few months.

“This figure is the BIGGEST ARGUMENT why delaying the recapitalization of BSP by diverting 50 percent and eventually 100 percent of its dividends to the Maharlika will effectively undermine the BSP’s ability to fulfill its mandate.”

Oh well… we will learn, one way or another. Hopefully, it won’t hurt too much.

Boo Chanco’s email address is [email protected] Follow me on Twitter @boochanco