How the SVB Collapse Threw a Spotlight on the Risk of Deposit Concentrations
3/28/2024
For the final installment in our series on the Silicon Valley Bank collapse a year on, we dialed up James Clarke, an asset/liability management expert who’s an RMA instructor, a member of RMA’s Editorial Advisory Board, and a consultant to banks nationwide.
Clarke, who previously shared lessons from the regional bank crisis in an August RMA Journal article, said that many of those lessons were accepted wisdom. Among them:
- Conduct effective stress testing and line up contingent funding for severe scenarios.
- Pay heed to interest-rate risk. During periods when monetary policy is holding down rates, plan for their eventual rise.
Something New
But there was an element of SVB’s failure—and Signature Bank of New York’s collapse two days later—that had not been widely considered, Clarke said: the danger of maintaining a large percentage of depositors from a particular industry or area, who might all react to certain events by withdrawing funds.
“We had thought about diversification of loan portfolios,” Clarke said. “But no one ever thought about diversification of deposit customers.” SVB’s depositors were largely “tech firms brought to the bank by the investment firms that took these tech firms public,” he said. Meanwhile, Signature had deposit concentrations in the real estate and cryptocurrency industries.
The rapid run on SVB showed that some industries are tight-knit, with influencers who can persuade others to exit banking relationships—something that can happen quickly in the era of social media and high-speed transactions.
Money on the Move
Although the overwhelming majority of regional banks did not have comparable balance-sheet challenges, Clarke said, these failures rattled regional bank depositors. Many moved their deposits to institutions that they perceived to be “too big to fail” after government actions in the 2007-2008 global financial crisis. “Some fabulous banks lost deposits” last year, he said. There was also “incredible deposit competition created by the increase in interest rates,” notably from money market funds, he said.
Another reason deposits dwindled was less dramatic, as households started spending down the savings they had built up during the pandemic era. “People now could go on vacation,” Clarke said. “They could go to restaurants. They started to move their money out of checking and savings.”
As disruptive as recent developments have been—including the steep rise in interest rates to fight pandemic inflation—it is possible to manage the risks they present, Clarke said. “You can’t blame the bank failures on the pandemic.”
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