After the Astonishingly Rapid Collapse of Two American Banks, a New Test Emerges

Of all the facts that have emerged about the collapse of two American banks in March, including unanswered warning letters from regulators, neglected interest rate risk, excessive levels of uninsured deposits, etc., one figure particularly evokes deep discomfort among financial regulators, and that is the number 36 – the number of hours it took for them to fail.

This is approximately the number of hours it took for Silicon Valley Bank (SVB) to go from a functional regional lender to being placed under regulatory management.

Depositors at the Door

Before that, SVB recorded the fastest bank run in U.S. history, with $42 billion in deposits withdrawn on the first day alone, while on the second day, depositors lined up at the doors seeking to withdraw another $100 billion of their money, before that California bank locked its doors.

The collapse of Signature Bank lasted only slightly longer.

As regulators at the U.S. Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) prepare to release two reports on the collapse of these banks on Friday, which will show what went wrong, the astonishing speed of the second and third largest bank failures in the U.S. remains in the spotlight. Moreover, aside from whether bank regulators could have been more vigilant or stricter, the current question is whether they could have acted more quickly.

– The number 36 has etched itself in my mind. How should we think about relationships and protocols given such a speed of failure – asked Raphael Bostic, president of the Atlanta Fed branch, earlier this month.

Decline in Deposits and Stock Prices

Indeed, even as officials finalize those two reports, a new test has emerged in real life – First Republic Bank, which reported a decline in deposits of over $100 billion in the first quarter this week, causing its stock to plummet to a record low and fueling speculation about the future of the 14th largest American bank.

The brutal sell-off of First Republic Bank’s shares dropped the market value of that regional lender by 41 percent just yesterday, to approximately $888 million. Thus, its capitalization fell below $1 billion for the first time, which is far below its peak in November 2021, when it exceeded $40 billion.

Constantly in a State of ‘Yellow Alert’

Bostic was preparing for more. He stated that he had spoken with banks in his region about the need for communication and familiarization with tools they might need in such circumstances, such as access to emergency loans from the Fed.

– I think ultimately we all need to act as if a ‘yellow alert’ is constantly announced – said Bostic.

The Fed’s report will focus on SVB, which regulators took over on March 10 after a failed emergency capital-raising attempt that helped trigger the rush of clients to the bank and the withdrawal of deposits.

Fed Vice Chairman for Supervision Michael Barr announced that the review would include recommendations, as well as confidential supervisory information that is not typically made public.

– I think every time you have a bankruptcy like this, the bank’s management has clearly failed, the supervisors have failed, and our regulatory system has failed – Barr told U.S. lawmakers at a hearing in March.

On Friday, the FDIC’s report on the supervision of Signature Bank, based in New York, which was closed a few days after SVB, is also expected to be released. A separate report on the U.S. deposit insurance system is expected by Monday, which FDIC Chairman Martin Gruenberg said would include a review of potential reforms.

Supervision Under Scrutiny

The supervisory regime at both regulators is under scrutiny from lawmakers who have questioned why banking controllers were not more aggressive in implementing corrections at failing banks.

Supervisors are usually reluctant because they point out deficiencies, said Sarah Bloom Raskin, a former Fed governor. “There seems to have been a real lack of urgency in intensifying that through the supervisory channel… This lack of follow-up needs to be examined,” she said.

Some policymakers argued that the rules that ease the strictest oversight for firms holding between $100 billion and $250 billion in assets, which included both SVB and Signature Bank, are partially to blame.

Daniel Tarullo, who led supervision and regulation at the Fed until 2017, said that policy correction would depend on how much of the blame for the failures is due to the peculiarities of those banks, primarily the far greater share of uninsured deposits than is typical, along with large portions of long-term securities that were losing value as short-term interest rates rose.

– One thing is certain this was a very serious supervisory failure – said Tarullo at an event this week at the Peterson Institute for International Economics. If the collapse of banks and the speed at which it occurs are considered the first signal of potential danger for future problems that could arise more frequently, greater changes in the regulatory regime may be needed, concluded Tarullo.