Impact Of Bank Collapses Largely Contained, But Uncertainties Remain
On Friday, March 10, Silicon Valley Bank collapsed, marking the second-largest bank collapse in U.S. history. The 16th largest bank in the U.S., Silicon Valley Bank’s failure stemmed from investment losses and a drop in share value that spurred depositors to withdraw their money.
While the promotional products industry tends to feel the impact of any large economic movement, it's believed that the promo marketplace writ large will not bear the brunt of the most recent events.
Silicon Valley’s Woes
Silicon Valley Bank has 17 branches in California and Massachusetts. Its troubles began on Wednesday of last week, when it announced a $1.8 billion after-tax loss on its investments, and that it needed to raise funds to allay depositors’ concerns. Its problems became acute when its customers began withdrawing money.
The California Department of Financial Protection and Innovation shut down SVB on Friday and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect insured depositors, the FDIC created the Deposit Insurance National Bank of Santa Clara and immediately transferred to it all insured deposits of SVB.
According to the FDIC, SVB had approximately $209 billion in assets and $175.4 billion in deposits. The FDIC typically insures accounts up to $250,000. With so many of the bank’s depositors being start-ups, tech companies like Etsy and Roblox, and various small businesses, many had well over a quarter million in the bank.
- The FDIC took the unusual step of guaranteeing the full value of depositors’ accounts as it saw SVB’s collapse representing a major risk to the U.S. economy.
- The money used to pay back SVB depositors will come from the Deposit Insurance Fund, which banks pay into. It will not come from U.S. taxpayers.
- SVB will remain closed. Its lenders and shareholders won’t be getting bailed out by the FDIC. Only depositors will be made whole.
What actually HAPPENS when the feds take over a failed bank? On my @Netflix show The G Word, I went behind closed doors with the FDIC to see how they seize a financial institution on the brink of collapse. Watch: pic.twitter.com/wj8fEdVNfM— Adam Conover (@adamconover) March 14, 2023
Over the weekend, Signature Bank in New York also collapsed. At the end of 2022, Signature had about $110 billion in assets and $74 billion in loans. Like SVB, it had an above average level of uninsured deposits and what could be termed “atypical” business uncertainty. Signature primarily did business with private equity and commercial businesses, but with SVB’s troubles, a cryptocurrency side to their business may have driven depositors’ run on the bank.
- Also like SVB, Signature was closed and taken over by state regulators. The FDIC extended the same deal to its depositors as well, making them whole, but the bank’s lenders and shareholders won’t receive a bailout.
“All customers who had deposits in these banks can rest assured they’ll be protected and they’ll have access to their money as of today,” said President Biden, speaking Monday on the situation surrounding SVB and Signature. “That includes small businesses across the country that banked there and need to make payroll, pay their bills, and stay open for business.
“No losses will be borne by the taxpayers. Let me repeat that: No losses will be borne by the taxpayers. Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund.”
To head off further uncertainty, the FDIC announced over the weekend that it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.
On Wednesday, May 15, the 167-year-old Credit Suisse bank roiled markets and raised concerns about the global banking industry on the news that it was on the brink of collapse. Following shares of the bank dropping as much as 30%, Switzerland’s central bank and financial market regulator announced that it would provide Credit Suisse with liquidity if need be.
- Credit Suisse has half a trillion dollars in assets and more than 50,000 employees, with operations and subsidiaries around the world. A “global systemically important bank,” trouble at the bank would be felt far beyond Swiss borders.
Credit Suisse’s troubles aren’t connected to SVB’s – it’s issues have been described as a “slow-moving car crash for years” – but its troubles raise further uncertainty around and scrutiny of the banking sector.
The Promo Perspective
What do the banking troubles mean for promo? Unless an industry company had an account with SVB or Signature, largely nothing, at least not directly.
We’re not likely heading towards another 2008-scale financial crash. Brad McMillan, chief investment officer for Commonwealth Financial Network, shared some thoughts on the current situation. He noted that unlike in 2008, the government has stepped in early and significantly to head off any contagion stemming from the bank failures.
“We are not set for a rerun of the Great Financial Crisis,” says McMillan. “This is not the end of the world. Instead, the takeaway so far is that regulators and the Feds are on the case and are willing and able to support the financial system. … Unlike in 2008, the government is getting ahead of the problem rather than trying to clean up afterward. That is a very positive sign.”
We may or may not be heading for a recession, but these banking issues may make one more likely. McMillan suggests that banks are likely to pull back on investments and lending as they resolve their issues, and that would slow economic growth.
- The tech and crypto sectors may bear the brunt of banks’ caution. While both SVB and Signature moved in these spaces, and other banks will likely not share their focus.