Coming in at Number Three on Yahoo Finance's top stories of 2023 is the collapse of regional banking institutions across the US.
Yahoo Finance's David Hollerith sheds light on the collapse of regional banks, beginning with the high-profile fall of Silicon Valley Bank and First Republic earlier in the year. He explains how "investor panic" ensued around other banks with perceived vulnerabilities, sparking a ripple effect of sell-offs and bank seizures.
Yahoo Finance's Jennifer Schonberger analyzes the regulatory response to shore up capital requirements and prevention of such large-scale banking failures going forward.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Video Transcript
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JULIE HYMAN: We are counting down the top 10 stories of 2023 here at Yahoo Finance. Coming in at number three, the collapse of the regional banks.
BRIAN SOZZI: Silicon Valley Bank's collapse as the second largest bank failure in the US.
JOE BIDEN: The FDIC took control of Silicon Valley Bank's assets.
JANET YELLEN: It is and should be a matter of concern.
BRIAN SOZZI: The regional banks, this is over the last two days. Some of these moves absolutely astonishing.
JENNIFER SCHONBERGER: Investors will take the fall on this. Officers of the bank will be fired.
SEANA SMITH: JPMorgan Chase is stepping in to buy First Republic's assets after the failed regional lender was seized by regulators.
SHERROD BROWN: We were reminded about how fragile our banking system could be. And as a result, your banks only got even more powerful.
JULIE HYMAN: It was the financial story that shook the markets. And the economy triggering warnings of recession. We've got team coverage of what happened and the impact it's had. Joining us now, Yahoo Finance's David Hollerith and Jennifer Schonberger. David, let's start with you. Just outline for us, remind us what happened.
DAVID HOLLERITH: Yeah. It's tough to say exactly when all this ended and began. But, on Thursday, March 9th, Silicon Valley Bank customers attempted to pull $42 billion in what was certainly the fastest bank run in US history. This came after SVB announced it had taken a hit selling some of its bonds, some of its underwater bonds.
It was also planning an emergency stock sale in a last ditch effort to raise more cash. Most of SVB's customers were also startups with deposits at the bank over the insurance limit. So regulators seized SVB that Friday. They seized Signature Bank two days later invoking the so-called systemic risk exception for both lenders, which guaranteed uninsured depositors would be made whole but was not without its controversy.
Though these two banks appeared to be outliers, other regional banks, specifically those with similar business models, faced mounting pressure once investors and depositors began to panic. So after seven weeks, from those two collapses, First Republic failed and was picked up by JPMorgan Chase from the FDIC. The rest of the year was by no means easy going to other tiny rural banks failed. Under higher rates, bank lending also slowed and deposit costs continued rising.
But yesterday, we saw around trip in which major indexes tracking the regional bank sector officially came back to levels before SVB collapsed. In general, 2023 was still the largest year ever for bank seizures as measured by assets. In total, five banks failed and two were the second and third largest failures in US history.
And it's a slightly different story for what went wrong in each of these banks. But if we just focus on Silicon Valley Bank, the first and second largest failure, the first to happen, the second largest, it came down to mismanagement of risks both on the interest rate side and on the depositor concentration side. All these banks had high levels of uninsured deposits. They also had some problems that are sort of symptomatic of just what a regional bank has to do, because they can't compete with the largest banks.
That being said, a lot of this has gone back to what management-- what management had done and what they hadn't done during the times of the crisis and before that.
JOSH LIPTON: David, thank you for that. And that context, which is now leading to new banking regulation and frustration, we should mention, from the bigger banks, Jennifer, what does the ripple effect now look like?
JENNIFER SCHONBERGER: That it does, Josh. A string of regional bank failures this spring prompted regulators to propose bank beef up their capital buffers to prevent against future failures. The proposal seeks to raise capital requirements by 16%, holding both giant banks and mid-sized institutions to new standards.
But banks, as you mentioned, vehemently opposed to this, launching an all-out campaign, including NFL ads. The banks argue that the new rules are just too onerous. Specifically, banks warned that the new capital requirements could make mortgages and loans to small businesses more expensive while also pushing up consumer prices and the cost of saving for retirement.
BRIAN MOYNIHAN: If you have the same capital requirements increased by 20% to do the exact same activities yesterday you have to get a higher return. And that higher return will be borne by the customer base.
JENNIFER SCHONBERGER: Even some members of Congress have expressed skepticism, including Democratic Senator Mark Warner, who says the banks may be right and that regulators have told him there are a lot of changes in store to that proposal. Take a listen.
MARK WARNER: I think they've got an argument. I think that you've got the circumstance where interest rates are at a recent high, the idea of additional capital requirements and additional buffer beyond what's already in place will mean there will be less capital available for lending.
JENNIFER SCHONBERGER: Regulators have extended a comment period until January. At which point, they will accept more feedback, take that into consideration, and put forth a final proposed rule likely in the spring. One source within one of the big banks tells me that if the proposal is not up to snuff for them, there's a very high chance they could take this to court. Back to you.
JULIE HYMAN: All right, Jen and-- Jen Schonberger and David Hollerith, thanks to you both. Appreciate it.
