Jérémie Boudinet, Head of Investment Grade Credit, La Française AM

1/ What happened?
a) A story of shadow banking exposure and depositor concentration

The US banking system is made up of more than 4,000 credit institutions, the overwhelming majority of which holds less than $10bn of assets. Regulatory oversight obviously differs whether you are JPMorgan Chase (more than $3,600bn of assets as at the end of 2022) or a small regional bank. Capital requirements are set at lower levels for smaller banks and they do not have to fulfill several liquidity constraints. Yet, this story is not about regulatory failure.

This is a story about fast growth and depositor concentration that ends badly for three banks:

Silvergate Bank (SI): assets grew from $2bn to $16bn between 2019 and 2021, then dwindled back to $11bn as at the end of 2022. This crypto-centric bank announced on Thursday that it was winding down its operations and liquidating the bank, which has been in financial turmoil since the collapse of crypto exchange FTX. Following a bank run in the fourth quarter, Silvergate leaned on the Federal Home Loan Bank of San Francisco for a $4.3 billion cash injection, which by the end of the quarter made up nearly all of its total assets.

Signature Bank (SBNY): its assets went from $50bn to $118bn between 2019 and 2021 and was much bigger than now-defunct Silvergate Bank. In the wake of the demise of SVB and SI, Signature Bank , the bank was closed on Sunday by its chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.

Silicon Valley Bank (SIVB): assets went from $71bn to $211bn between 2019 and 2021 and were stable until the end of 2022. As its name suggests, SVB was lending to companies mostly based in the Silicon Valley, with a focus on lending to technology companies, providing services to venture capital and private equity firms. It rapidly grew to become the 18th largest bank holding company in the US. During the 2019-2021 phase, SVB received significant inflows of deposits from venture capital firms that it needed to cover from an asset standpoint. As such, management sought to chase yield by buying long-duration bonds (Treasuries, MBS…). The bank started to lose deposits as VCs pulled cash through operating capital, which pressured management to sell some of its long-term assets. It seems like these assets were not really properly hedged, but we lack sufficient information thus far.