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The government's plan to address the emerging banking crisis includes ensuring that depositors at SVB and Signature Bank are fully reimbursed with immediate effect, and both banks have been closed. However, common and preferred shareholders are likely to suffer losses, while general creditors will receive what remains after depositors have been paid. This implies that companies that rely on funds from SVB to pay their employees can now breathe a sigh of relief.
In addition, the Fed will offer additional funding to banks through the "discount window," and the Treasury has set aside money for a "Bank Term Funding Program" through the Fed, allowing banks to obtain additional funding as required.
SBNY's stock has experienced a volatile rise and fall. Although it has not been confirmed yet, it is likely that the stock will be zeroed out and canceled on Monday because the bank has been seized by regulators. Signature Bank, which was known for its crypto-friendly policies, had approximately $110 billion in assets at the last count. According to a source in the real estate industry, Signature Bank had "aggressive" lending standards and was well-known among high net-worth real estate investors, despite being relatively unknown to most people.
As for SVB, it is already out of business, with the stock closing at around $106 per share on Thursday.
Read More: Dow Jones Futures Rise As Regulators Protect All SVB Deposits, Signature Bank Closed
Analysis of the 2023 Bank Crisis
One aspect that stands out in this round of bank failures is the speed with which events have unfolded. In 2008, news would still spread quickly, but the viral nature of social media was not as prevalent. Nowadays, more people can receive real-time news through Twitter, and they can even witness bank runs through videos being shared online. In the past, people would have likely read about it in the newspaper the following day or online from their homes. Today, the news is available 24/7 on smartphones.
However, have banking regulations kept pace with technology? It is doubtful. This could pose a problem for banks such as San Francisco-based First Republic (FRC) and Beverly Hills-based PacWest (PACW). On Saturday, widely circulated videos showed hundreds of desperate First Republic customers standing outside the branch in the rain in Brentwood, a wealthy neighborhood in Los Angeles.
On Monday, regulators have allowed First Republic to open its doors, but it is expected that thousands of customers will flock to the bank first thing in the morning to withdraw their money. However, news has emerged that First Republic is receiving a rescue package from the Fed and JPMorgan Chase (JPM), making its survival more likely. While this may alleviate concerns, it may still be challenging to stop the bank run. Even if the government and JPMorgan guarantee the deposits, customers may still feel safer withdrawing their funds. In bank runs, perception is just as important as reality; if customers believe a bank is unsafe, it can trigger a run regardless of the bank's actual safety. Whatever the terms of the bailout, they are unlikely to be favorable for FRC shareholders.
Meanwhile, the closure of Signature Bank is also noteworthy. Regulators had called various banks into question, and it appears they found something concerning at SBNY, as evidenced by the removal of management mentioned in the press release. More information is expected to emerge over time.
One interesting observation is the effective response of Powell's Fed to the current banking crisis, despite their previous failures to address inflation concerns. The risk of partisan debates causing delays in response and resulting in a surge of unemployment was avoided due to the swift action by the Fed and Treasury. Powell's experience dealing with the 1990 failure of the Bank of New England, as mentioned in his biography by WSJ's Nick Timiraos, may have provided insight into his decision to prioritize making depositors whole. The issue of moral hazard is present, as the government does not want to incentivize banks to take excessive risks with the safety net of FDIC guarantees, but also cannot allow innocent businesses to suffer from banking failures.
Implications For The Stock Market
Regarding the stock market, in my previous report on Friday, I stated that the common and preferred stocks of the large banks that are too big to fail are good buys, most regional banks should be held, and banks with runs or credible rumors should be sold. I still maintain this stance. Signature is the second-largest bank to fail, and it's likely that more banks will fail in the upcoming days and weeks, particularly big regional banks already under significant pressure. However, as of now, there is nothing to suggest that the entire banking system is at risk. Therefore, bold investors may receive favorable compensation by investing in the preferred and common stock of too-big-to-fail banks. Although I believe cash is the best overall market bet and stocks are relatively expensive, value can be found in various places.
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