Spring Bank CEO on Silicon Valley Bank Closure and Regulatory/Government Response
The important news of this past weekend isn’t which college teams made the NCAA Basketball Tournament or that we “Sprung Forward” into daylight savings time. Nor is it that Packer Nation still hasn’t received word on whether or where Aaron Rodgers will play next season. In my opinion the news story to highlight is the closure of Silicon Valley Bank (SVB) on Friday and the regulatory and government subsequent responses.
SVB had a unique business focus and balance sheet structure. Their focus was providing credit to tech startup firms that have private equity support. Their failure had nothing to do with credit problems. SVB was heavily concentrated with the tech industry in both their loan portfolio and their deposit base. The bank had been highly liquid with a loan to deposit ratio of under 45% (Spring Bank’s ratio is approximately 100%). SVB (and other banks with low loan to deposit ratios) invested the excess liquidity in government bonds, government guaranteed mortgage bonds or other guaranteed investments. These securities were purchased when interest rates and returns on government securities were very low. As interest rates rose quickly over recent months the market value of these securities fell, which lead to unrecognized losses in their investment portfolio. When some negative reports about SVB came out, a “run” on SVB occurred which “forced” SVB to sell billions of dollars of securities and then recognize a loss of a reported $1.8 billion. The announced sale of securities exacerbated SVB’s liquidity issue as depositors moved their balances. The SVB business model and balance sheet structure is quite different than that of Spring Bank and most other banks.
Over the weekend the Federal Reserve Board, the FDIC and the Treasury Department worked with the Biden administration’s support and made significant announcements. First, The Federal Reserve Board announced a new bank lending/liquidity program which is designed to provide another source of liquidity to banks holding government securities or government backed securities within their investment portfolios. Second, and most importantly, Treasury Secretary Yellen announced that based upon the recommendation of the FDIC and the Federal Reserve that all depositors of SVB, both insured and uninsured will have access to their deposit balances on Monday/today. In my opinion this move was made to “calm” the markets and provide confidence to depositors in all banks. This extraordinary response was both appropriate and needed to avoid irrational moves by depositors which, if unabated, could conceivably cause significant issues for other banks.
In conclusion, Spring Bank is not like SVB. Our loan portfolio is well diversified. A very high percentage of our deposit base is guaranteed by FDIC insurance guidelines. As with every other bank, we do have unrecognized losses within our government securities portfolio, but we would remain well capitalized even if we sold the entire portfolio at current market values and recognized the losses. Fortunately, Spring Bank has not sold any securities because we have numerous other sources of liquidity, such as the FHLB, Fed Discount Window, brokered deposits and correspondent bank lines of credit, which provide liquidity if/when needed.