QuickDrive
What should banks do now?
with Jason Blumberg
Jason Blumberg is a banking analyst and financial advisor with Blue Hill Advisors. He has previously advised banks and financial institutions as an investment banker with Lazard, Cowen and Jefferies, and provided financial and investment analysis on banks for HoldCo Asset Management and Driver Management. He was part of the team that raised concerns with Silicon Valley Bank long before its recent issues emerged.
We caught up with him about how he’s thinking about the challenges facing banks after the collapse of Silicon Valley Bank, Signature Bank, and Silvergate Bank.
Andrew Wilson: What should banks be doing now?
Jason Blumberg: Most banks have diverse deposit bases and strong, prudent lending standards and conservative practices. The problem now is twofold: 1) some banks are highly correlated with industries, such as crypto or the VC/startup world, that have caused risks to be more concentrated, and 2) there have been runs on these banks, particularly Silicon Valley Bank, and that can create contagion that spreads to other banks. Banks with strong balance sheets and little exposure to these problems should emphasize that when talking to customers, investors, media, and other stakeholders.
Banks that run into headwinds need to be clear, transparent and explicit about what’s happening, why, and what they’re doing about it. In the case of Silicon Valley Bank, announcing a significant transaction without adequate context or forewarning likely precipitated the event - a potential liquidity crisis - they were trying to get ahead of.
AW: Are a lot of other banks in trouble?
JB: There are two main issues facing banks right now, the first of which is a relatively recent problem and the second of which has been building for the last few years. The first issue is a potential run on bank deposits. Right now, it seems like this issue is specific to the banks that have failed, based on their business practices and their customer bases. The problem is the contagion factor, and so we are watching carefully to see if other banks have idiosyncratic, specific issues that cause concern. So far, that’s a limited universe of banks, but the problem with a situation like this is that customers and investors feel pressure to make decisions in real time, which can lead to a situation like what we saw at Silicon Valley Bank when a large volume of customers withdrew deposits or shifted their business very quickly.
The second issue, which has been building for the last few years and is more widespread, is an asset-liability duration mismatch that could lead to shrinking margins and losses if rates remain high for a prolonged period. Flooded with low-cost deposits due to fiscal and monetary stimulus to combat the pandemic, banks sought to invest that liquidity or make loans in order to generate a spread. Now that rates have risen, the value of those lower yielding, fixed rate assets has declined significantly while funding costs continue to increase. There is no easy solution to this problem, as evidenced by Silicon Valley Bank's failed attempt to get ahead of the issue.
AW: You were involved in an analysis of Silicon Valley Bank in 2021 where you pointed out some issues then, long before the current crisis. What did you see at that time?
JB: The issue with Silicon Valley Bank was that it was so tied to the tech industry, including benefiting from equity holdings of startups and VC-backed companies. We thought that led to an inflated valuation of the Bank – it was seen as a tech company, not a bank – that would be risky. That industry correlation ended up being part of the Bank’s recent problems, because so many of its customers were in that Silicon Valley/tech universe facing real challenges as the economy has slowed, causing a steady decline in deposits, and then culminating in a run on the bank when customers in that industry started to pull deposits at essentially the same time. The lesson is that concentration risk is real, and banks that are highly correlated to specific industries should be clear about what those risks look like in this environment.
AW: Wasn’t the SVB issue really caused by social media platforms that spread information (or misinformation) so quickly?
JB: There’s no doubt that the flow of information or misinformation is a risk. Bank boards and executives need to be very thoughtful, clear and transparent about what they’re doing and why, so that they can ensure stakeholders have accurate and fulsome information on which to make decisions.
AW: Did the government need to act to insure deposits above the $250K FDIC insurance limit?
JB: That will be the subject of debate for many years. The clear intention was to limit panic among depositors, especially at other banks, and to ensure that customers of the banks that failed could make payroll and continue to do business. The government took strong action, and in the moment it’s hard to argue with it.
AW: Was this a bailout?
JB: It’s not a bailout of the stockholders, bondholders or executives of banks like Silicon Valley Bank, at least not yet. Some are saying it’s a bailout of the depositors, which might be true, but the depositors didn’t really do anything wrong based on what we know now, so it ends up being a term that may be accurate but isn’t particularly helpful.