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Banking Stability Post-SVB Collapse: A Lesson in Market Resilience

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Robert Tavares

March 9, 2024 - 13:06 pm

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Turbulence in Banking: The Ripple Effects of Silicon Valley Bank's Collapse and NYCB's Shaky Stand

A Year After Silicon Valley Bank's Fall

One year ago, the financial world felt a shockwave as Silicon Valley Bank, a cornerstone in America's banking infrastructure, crumbled—an event that shook market confidence and stoked anxieties of a wider contagion. This pivotal moment became a stark symbol of the fragility within the sector, prompting scrutiny over other regional banking institutions.

Regional Banks Under the Microscope

As calm waters turned turbulent, the banking sector rarely at the center of market theatrics was thrust into a disquieting limelight. Typically outshone by the behemoths of the tech industry and favorites of the pandemic sheen, regional banks were now at the heart of investor concerns.

The Unstable Ascent of New York Community Bancorp

In this atmosphere of renewed focus on regional banks, New York Community Bancorp (NYCB) has captured attention with its shares' precarious descent. Recently, the institution became the beneficiary of a billion-dollar capital infusion steered by former Treasury Secretary Steven Mnuchin, an act that steadied its faltering stock. Analysts have since categorized NYCB's tribulations as unique, segregating its situation from a broader sector turmoil.

Evaluating the Aftermath and Lessons Learned

Steven Kelly, associate director of research at the Yale Program on Financial Stability, explains, "Crises tend to follow a pattern—initially, the market reacts in a sweeping panic, disposing of investments first and dissecting the details subsequently. With a year's worth of assessment, the market now recognizes what sets NYCB apart from similar entities."

The Sudden Downfall of Silicon Valley Bank

The precipitous downfall of Silicon Valley Bank commenced following a revealing after-hours announcement on March 8, last year. The bank's parent company divulged the liquidation of almost its entire available-for-sale securities portfolio at a loss and was in search of additional capital through a stock sale. The following day, the stock value plummeted, leading to a hemorrhage of withdrawals from venture capitalists advising clients to retract their funds due to FDIC insurance limits being surpassed. With trading of its shares frozen by that Friday morning, Silicon Valley Bank succumbed to failure and entered receivership. Along came the entrainment of Signature Bank and then the stumbling of First Republic Bank before its eventual collapse in May.

The Turning Tide of Panic

Brandon King, an analyst at Truist Securities, reflects on the moment, remarking, "None foresaw a run on deposits. It was a panic that started small and magnified rapidly, spiraling into a fear-dominated atmosphere."

Read more: NYCB Turmoil Contained as Calm Prevails Among Regional Banks

The Weighing Factors and Lasting Impact

Last year, lingering concerns—from the repercussions of higher interest rates on securities' unrealized losses to the evacuation of uninsured deposits and hyper-focus on a singular client base—played heavily on the fates of SVB's contemporaries. Consequently, the KBW Bank Index faced its most significant monthly decline since the advent of COVID-19, paralleled by a surge in the trading volume of a pivotal exchange-traded fund tracking regional bank stocks.

The Response of the Sector and the Investors

Drawing averse reactions, investors distanced themselves, contributing to the depreciation of banks such as Western Alliance Bancorp and PacWest Bancorp. Notwithstanding, Western Alliance has since rallied, and PacWest reconciled through a merger.

NYCB: From Victor to Vulnerable

NYCB emerged as one of the rare outperformers last year, absorbing assets from Signature Bank along with an accrual of deposits and loans, courtesy of the FDIC. A resulting 19% gain last year helped the Hicksville, NY-based bank to overshadow many of its counterparts. However, certain growth-induced complications soon presented themselves.

Regulatory Realities and Capital Concerns

The bank's acquisitions catapulted it past the crucial $100 billion threshold, realigning it within Category IV banks and a different regulatory framework. Post-earnings report in January, NYCB realigned its dividend and allocated substantial provisions for potential loan losses, triggering a historic drop in its share price. The ensuing period has been marked by pressure on share value, credit downgrades, and revelations of deficiencies in loan risk assessments, alongside top management restructurings.

The Mnuchin-Led Salvation

Confirming confidence in the beleaguered bank, Steven Mnuchin led an equity deal, infusing over a billion dollars into NYCB and appointing former Comptroller of the Currency Joseph Otting as the incoming CEO. This move revitalized NYCB's stock, yielding stability, although it continues to lag post-earnings revelation.

Embracing Boredom as a Banking Virtue

In response to last year's market rally, which regional banks trailed significantly, the sector had to contend with steeper costs for deposits post-SVB, as well as amplified regulatory scrutiny. It was a period that enlightened the market that a passive approach could become profitable, according to Bill Smead, CIO at Smead Capital Management. Smead advocates for the potential gains in letting banks exercise "business as usual," producing steady returns on equity and judicious allocation of surplus capital.

Trust and Perception in 2023's Banking Narrative

As new challenges around trust and public perception surface this year, the banking industry acknowledges the necessity to reaffirm trust continually. René Jones, CEO of M&T Bank Corp., iterates this commitment in a recent annual letter, pointing to 2023 as a wakeup call for the industry's collective effort to regain public confidence.

Stability: A Coveted Commodity in Regional Banking

For investors and market watchers, regional banking's allure may now hinge on this newfound appreciation for predictability and monotony. Both Truist's Brandon King and RBC Capital Markets' Gerard Cassidy have echoed a sentiment increasingly common in finance circles: sometimes, being unremarkable can be most desirable. As Cassidy succinctly put it during a recent banking conference, "Boring is beautiful."

In Conclusion: Market Lessons and the Way Forward

The market's response to the SVB fiasco and the NYCB predicament underscores a broader realization: the unpredictable can quickly become the precedent in finance. As regional banks navigate these tumultuous waters, embracing a less glamorous, steady-as-she-goes philosophy could be the key to enduring the capricious tides of markets and maintaining the trust of their clientele.

©2024 Bloomberg L.P.