Brian Stone 0:02
Hello, and welcome to the buzz of bank automation news podcast. My name is Brian Stone, and I’m the Associate Editor at Bank Automation News. Joining me today is Mike Sekits, co-founder and managing director of the BTech Consortium. Mike discusses how the fall of Silicon Valley Bank affected the entire banking industry, how SVB not having a chief risk officer played into its downfall and the major factors that led to the bank’s eventual collapse.Mike Sekits 0:28
Right? I think when, when something like this happens, it’s often not a simple answer. It’s multiple causes. And it’s nuanced. Overall, there’s a lack of confidence at the bank, and depositors all got nervous at the same time. And they all withdrew money at the exact same time, no bank can survive a run on deposits. And at Silicon Valley Bank, as has been reported, it happened incredibly fast. And that’s because of a couple of things you had a concentrated, depository base, that all speak with each other. And they do it on social media, and it happens instantaneously, and they share that information. And it was incredible, how fast information spread, how many people and emails are being circulated about you better move your money out of this bank or that bank. I mean, that’s scary for the banking system. You know, what were some of the causes that created the concern, you know, the fact that you had silver gate capital fail just a few days prior, in, you know, what became a very high profile failure, and based on the relative size and importance of silver gate became political. So you had politicians weighing in making acquisition accusations without having any facts, creating pressure on a bank, that that’s a bad thing. And then, you know, silver gates failure is common with, you know, what people were starting to analyze it Silicon Valley Banks, you know, silvergate did the same thing in, you know, last year, they be because the both of these are public. So another factor is, when you have a public bank versus private banks is Silicon Valley Bank is private, it’s probably doesn’t happen. But because they’re public. And because silvergate failed, because it it too, decided to go long on its securities portfolio, extended out the duration, and then when the deposit started to run off, they had this built in loss, why do they have a loss because interest rates have risen at an unprecedented pace, right. And that’s very difficult for any bank to manage. We’re talking about securities portfolios, but on the loan side, those loans are, you know, that are fixed, that aren’t adjusting up fast enough, those loan books are undervalued as well, and no one’s no one’s really talking about that. So there’s a there’s a number of factors that lead to a loss of confidence. And, you know, the, again, social media, and then in addition to the fact that we all have mobile banking, and you can wire you know, through the internet, you could do that 10 years ago, you just have to go the branch, they would check, you know, your ID had to sign. So the pace at which people were able to actually get to their funds and move them to another bank was, it was incredible. Look at Washington Mutual what back in 2008. It was a 10 day bank run. And depositors took out 16 point 7 billion versus the 43 billion that was taken out in one day, makes no no bank and stuff of that sort of bank rock that silvergate Bank and, and Silicon Valley Bank, suffered and, and still lived to talk about it.

Brian Stone 3:57
You talked a little bit about this. But we’ve written some stories about, you know, Signature Bank, first republic.

Mike Sekits 4:04
So there’s also there’s also a perception in the marketplace around relative banks and how conservative they are. So silicon bank, you know, is pretty aggressive in certain aspects of its lending. They’ll make loans that other banks will make, as an example, first republic Bank is a very conservatively managed bank, and had trouble competing against Silicon Valley Bank because they wouldn’t lend to startups. And so you have one of the things that I think is difficult with the seizure of Silicon Valley Bank is, you know, what did they do with the those those quirky loans that, you know, most banks wouldn’t make? Those Those lending practices were highly tied to the deposits and it’s difficult for a more traditional bank to value the Silicon Valley banking practice because because it is so Different.

Brian Stone 5:01
So with that differing of, I guess, philosophy between, you know, Silicon Valley Bank and first republic, why do you think that Silicon Valley Bank failings sort of led to that trickle down of first republic also feeling it?

Mike Sekits 5:17
It’s a natural competitor, it’s also in the Bay Area, you know, they’re they’re banking, some of the same customers. But I don’t know, I mean, if you look at the financial strength of first republic, they’re stronger in almost every way. It’s a much more considered lender, they don’t have the issue, and they’re kind of held to maturity securities portfolio, it’s nowhere near what Silicon Valley Bank had done. So I’m not sure I was stunned to find them, you know, in the same boat, you know, Silicon Valley Bank shouldn’t have failed, but they they made a major mistake in in how they reinvested their securities portfolio. But to see first republic, you don’t also have a run people standing outside the events. That’s really, really scary. But but it just goes to show that any bank is susceptible, once a bank run starts, doesn’t necessarily make it, you know, their fault

Brian Stone 6:21
signature, I’m not as familiar with their sort of lending strategy. What was it? What was it that kind of caused their collapse? No, so they had just some unusual

Mike Sekits 6:30
things there, they were the primary competitor to silver gate bank, they had, they were gathering deposits from crypto companies, they had an exchange, much like the silver gate exchange, many of the customers that, you know, had to get off of silver gate that were fleeing silver gate with trying to, you know, get onto the signature platform is pretty significant part of their, their balance sheet, you know, 15 billion at 110 billion something to that effect, nothing like silver gate, which is all, you know, it’s all deposits from the crypto community is inherently challenging, though, for community banks and regional banks and national banks of all size to manage this rapid interest rate movement. And when you know, a bank inherently has to take some risk, it has to take some credit risk, it has to take some interest rate risk. And the bank can’t just be sitting there with cash, you know, waiting for all the deposits thought depositors to show up. So they’re ready to pay them out. They need they have to take some some duration risk. And when you have, you have rates rise for 50 basis points in 12 months, you can look at any bank’s balance sheet closely, and you’re gonna see some cracks in it doing some more kind of eclectic lending as well, I wouldn’t put it all the way to where Silicon Valley is. But if you again, in this environment, if you start looking too closely at the bank’s balance sheet, and start marking not just the securities portfolio, but the loan portfolio, the bank, a bank can’t can’t afford to have the costs run off.

Brian Stone 8:07
So one of the other things that I had seen about Silicon Valley Bank that I wanted to ask you about, I’m sure it played a huge role. But I read that they didn’t have a chief risk officer for multiple months last year. Yeah, do you think that was sort of to blame for for what happened

Mike Sekits 8:25
doesn’t help. It’s another, you know, you look at an airplane crash, it’s never one thing, it’s a series of things and not having a chief risk officer in place. The timing of when she left is interesting. And, you know, inside of these committees, inside the the offices of banks, banks have had to make some very difficult decisions. And I’m sure there’s been some fierce debates inside of these committees. And while it may not show up in the official record, and notes, you know, she could have been on the other side of the discussion, a very heated discussion about what you do when $90 billion of deposits shows up in a year, which, you know, is unhealthy growth growing too fast. And how do you deploy that, you know, she could have very well been on the side of, we gotta ladder in, we can’t just take all 90 billion and go long. We’ve got to keep the majority of that and in short duration treasuries and ladder in that’s what, you know, it’s easy to go 2020 Here, but that would have been the more prudent strategy and and there’s a scenario where she was on the other side of that debate. She lost the debate and said, You know, I’m gonna be quiet about this. I’ll take my pay out, I’ll make it look like nothing happened but I can’t sit there in good conscious and allow the bank to take this kind of duration risk. It’s not out of the realm of possibility. It’s it’s we Your timing when she left in April, it’s right after a meeting on risk. So you had the challenge on the on the on, you know how to deploy your deposits. You also have real challenges on how you’re going to price your deposits to maintain them. And that’s what we’ve seen community banks really struggle with over the last nine months, is, you know, the hub big depositors coming to them saying, you know, you’ve had my money for virtually free for 10 years now. I’ve got offers to go across the street and get four or 5%. What are you going to do for me? And so those banks are, they’re put in a tough spot or like to hold those deposits that had to be very, you know, proactive, reactive, and put together pricing plans that put stress on their margins, put stress on the bank. So you so you pray, I mean, just to put this in, like what they’re really faced with your small community bank, he got one of your biggest customers just got 10 million in your bank. He’s like, I gotta move it. I gotta go get a better rate. You go out on a limb, right? You go, Okay, I’ll make you I’ll make you whole. I gotta, I gotta price up at four and a half we your book might not be your loan book might not be yielding. A large part of your securities portfolio might only be yielding 2% You’re really putting pressure on your margins, and it it it makes banking riskier.

Brian Stone 11:25
You’ve been listening to the buzz of bank automation news podcast, please follow us on Twitter and LinkedIn. And as a reminder, you can rate this podcast on your platform of choice, be sure to visit us at Bank automation news.com.

Brian Stone 0:02
Hello, and welcome to the buzz of bank automation news podcast. My name is Brian Stone, and I’m the Associate Editor at Bank Automation News. Joining me today is Mike Sekits, co-founder and managing director of the BTech Consortium. Mike discusses how the fall of Silicon Valley Bank affected the entire banking industry, how SVB not having a chief risk officer played into its downfall and the major factors that led to the bank’s eventual collapse.Mike Sekits 0:28
Right? I think when, when something like this happens, it’s often not a simple answer. It’s multiple causes. And it’s nuanced. Overall, there’s a lack of confidence at the bank, and depositors all got nervous at the same time. And they all withdrew money at the exact same time, no bank can survive a run on deposits. And at Silicon Valley Bank, as has been reported, it happened incredibly fast. And that’s because of a couple of things you had a concentrated, depository base, that all speak with each other. And they do it on social media, and it happens instantaneously, and they share that information. And it was incredible, how fast information spread, how many people and emails are being circulated about you better move your money out of this bank or that bank. I mean, that’s scary for the banking system. You know, what were some of the causes that created the concern, you know, the fact that you had silver gate capital fail just a few days prior, in, you know, what became a very high profile failure, and based on the relative size and importance of silver gate became political. So you had politicians weighing in making acquisition accusations without having any facts, creating pressure on a bank, that that’s a bad thing. And then, you know, silver gates failure is common with, you know, what people were starting to analyze it Silicon Valley Banks, you know, silvergate did the same thing in, you know, last year, they be because the both of these are public. So another factor is, when you have a public bank versus private banks is Silicon Valley Bank is private, it’s probably doesn’t happen. But because they’re public. And because silvergate failed, because it it too, decided to go long on its securities portfolio, extended out the duration, and then when the deposit started to run off, they had this built in loss, why do they have a loss because interest rates have risen at an unprecedented pace, right. And that’s very difficult for any bank to manage. We’re talking about securities portfolios, but on the loan side, those loans are, you know, that are fixed, that aren’t adjusting up fast enough, those loan books are undervalued as well, and no one’s no one’s really talking about that. So there’s a there’s a number of factors that lead to a loss of confidence. And, you know, the, again, social media, and then in addition to the fact that we all have mobile banking, and you can wire you know, through the internet, you could do that 10 years ago, you just have to go the branch, they would check, you know, your ID had to sign. So the pace at which people were able to actually get to their funds and move them to another bank was, it was incredible. Look at Washington Mutual what back in 2008. It was a 10 day bank run. And depositors took out 16 point 7 billion versus the 43 billion that was taken out in one day, makes no no bank and stuff of that sort of bank rock that silvergate Bank and, and Silicon Valley Bank, suffered and, and still lived to talk about it.

Brian Stone 3:57
You talked a little bit about this. But we’ve written some stories about, you know, Signature Bank, first republic.

Mike Sekits 4:04
So there’s also there’s also a perception in the marketplace around relative banks and how conservative they are. So silicon bank, you know, is pretty aggressive in certain aspects of its lending. They’ll make loans that other banks will make, as an example, first republic Bank is a very conservatively managed bank, and had trouble competing against Silicon Valley Bank because they wouldn’t lend to startups. And so you have one of the things that I think is difficult with the seizure of Silicon Valley Bank is, you know, what did they do with the those those quirky loans that, you know, most banks wouldn’t make? Those Those lending practices were highly tied to the deposits and it’s difficult for a more traditional bank to value the Silicon Valley banking practice because because it is so Different.

Brian Stone 5:01
So with that differing of, I guess, philosophy between, you know, Silicon Valley Bank and first republic, why do you think that Silicon Valley Bank failings sort of led to that trickle down of first republic also feeling it?

Mike Sekits 5:17
It’s a natural competitor, it’s also in the Bay Area, you know, they’re they’re banking, some of the same customers. But I don’t know, I mean, if you look at the financial strength of first republic, they’re stronger in almost every way. It’s a much more considered lender, they don’t have the issue, and they’re kind of held to maturity securities portfolio, it’s nowhere near what Silicon Valley Bank had done. So I’m not sure I was stunned to find them, you know, in the same boat, you know, Silicon Valley Bank shouldn’t have failed, but they they made a major mistake in in how they reinvested their securities portfolio. But to see first republic, you don’t also have a run people standing outside the events. That’s really, really scary. But but it just goes to show that any bank is susceptible, once a bank run starts, doesn’t necessarily make it, you know, their fault

Brian Stone 6:21
signature, I’m not as familiar with their sort of lending strategy. What was it? What was it that kind of caused their collapse? No, so they had just some unusual

Mike Sekits 6:30
things there, they were the primary competitor to silver gate bank, they had, they were gathering deposits from crypto companies, they had an exchange, much like the silver gate exchange, many of the customers that, you know, had to get off of silver gate that were fleeing silver gate with trying to, you know, get onto the signature platform is pretty significant part of their, their balance sheet, you know, 15 billion at 110 billion something to that effect, nothing like silver gate, which is all, you know, it’s all deposits from the crypto community is inherently challenging, though, for community banks and regional banks and national banks of all size to manage this rapid interest rate movement. And when you know, a bank inherently has to take some risk, it has to take some credit risk, it has to take some interest rate risk. And the bank can’t just be sitting there with cash, you know, waiting for all the deposits thought depositors to show up. So they’re ready to pay them out. They need they have to take some some duration risk. And when you have, you have rates rise for 50 basis points in 12 months, you can look at any bank’s balance sheet closely, and you’re gonna see some cracks in it doing some more kind of eclectic lending as well, I wouldn’t put it all the way to where Silicon Valley is. But if you again, in this environment, if you start looking too closely at the bank’s balance sheet, and start marking not just the securities portfolio, but the loan portfolio, the bank, a bank can’t can’t afford to have the costs run off.

Brian Stone 8:07
So one of the other things that I had seen about Silicon Valley Bank that I wanted to ask you about, I’m sure it played a huge role. But I read that they didn’t have a chief risk officer for multiple months last year. Yeah, do you think that was sort of to blame for for what happened

Mike Sekits 8:25
doesn’t help. It’s another, you know, you look at an airplane crash, it’s never one thing, it’s a series of things and not having a chief risk officer in place. The timing of when she left is interesting. And, you know, inside of these committees, inside the the offices of banks, banks have had to make some very difficult decisions. And I’m sure there’s been some fierce debates inside of these committees. And while it may not show up in the official record, and notes, you know, she could have been on the other side of the discussion, a very heated discussion about what you do when $90 billion of deposits shows up in a year, which, you know, is unhealthy growth growing too fast. And how do you deploy that, you know, she could have very well been on the side of, we gotta ladder in, we can’t just take all 90 billion and go long. We’ve got to keep the majority of that and in short duration treasuries and ladder in that’s what, you know, it’s easy to go 2020 Here, but that would have been the more prudent strategy and and there’s a scenario where she was on the other side of that debate. She lost the debate and said, You know, I’m gonna be quiet about this. I’ll take my pay out, I’ll make it look like nothing happened but I can’t sit there in good conscious and allow the bank to take this kind of duration risk. It’s not out of the realm of possibility. It’s it’s we Your timing when she left in April, it’s right after a meeting on risk. So you had the challenge on the on the on, you know how to deploy your deposits. You also have real challenges on how you’re going to price your deposits to maintain them. And that’s what we’ve seen community banks really struggle with over the last nine months, is, you know, the hub big depositors coming to them saying, you know, you’ve had my money for virtually free for 10 years now. I’ve got offers to go across the street and get four or 5%. What are you going to do for me? And so those banks are, they’re put in a tough spot or like to hold those deposits that had to be very, you know, proactive, reactive, and put together pricing plans that put stress on their margins, put stress on the bank. So you so you pray, I mean, just to put this in, like what they’re really faced with your small community bank, he got one of your biggest customers just got 10 million in your bank. He’s like, I gotta move it. I gotta go get a better rate. You go out on a limb, right? You go, Okay, I’ll make you I’ll make you whole. I gotta, I gotta price up at four and a half we your book might not be your loan book might not be yielding. A large part of your securities portfolio might only be yielding 2% You’re really putting pressure on your margins, and it it it makes banking riskier.

Brian Stone 11:25
You’ve been listening to the buzz of bank automation news podcast, please follow us on Twitter and LinkedIn. And as a reminder, you can rate this podcast on your platform of choice, be sure to visit us at Bank automation news.com.