One of the nation’s most prominent financial services thought leaders is warning that the banking industry has been shaken violently by last week’s collapse of Silicon Valley Bank, the second largest bank failure in U.S. history.
Josh Steiner, managing director of Stamford-based Hedgeye Risk Management, observed that banks of all sizes are responding to the March 10 demise of Silicon Valley Bank after a bank run on its deposits.
“Banks are already getting nervous,” said Steiner in a HedgeyeTV appearance. “We know that from the senior loan officer opinion surveys for last three quarters in a row – things have been getting tighter, with respect to willingness to lend [and] just general perception of credit conditions. This dynamic and Silicon Valley is sending shockwaves, I guarantee you, across every bank in America right now – they are tuned into this thing like a hawk.”
Steiner added that the nation’s banks are now “convening emergency ALCO sessions – asset liability committee management sessions – right now to talk about this situation, what’s going on, how to try and mitigate any similar risk.”
For the near-term, Steiner predicted that bank underwriting standards are “going to tighten even further,” which he warned will “put tremendous pressure prospectively on the Fed from a policy standpoint.” And while the jolt of Silicon Valley Bank’s failure has dominated the financial news headlines for the past few days, Steiner feared the general public is not cognizant to resonance from this happening.
“I don’t think most people who are not bank analysts or financial analysts really have an understanding of the severity,” he said. “You’re the 16th largest bank in the country and you lose 75% of its equity valuation in a day and a half – that’s incredible.”
Steiner pointed out that a number of bank stocks tanked with the news from Silicon Valley Bank, with a growing fear that depositors will switch their funds out of their current banks.
“With today’s digital age, you can move deposits around to get better yields in almost no time whatsoever,” he stated, noting the shifting of deposit money could create new friction. “Banks have been awash in deposits for so long that they’ve been reluctant to take rates up. And now, all of a sudden, you’re seeing this sort of deposit flight risk manifest – first on the margin, where it’s the greatest risk [with] sophisticated VC and PE depositors at Silicon Valley basically saying, ‘Either I want my money or I want your yield on my money.’
“But this can easily propagate out beyond to just sort of average investors – and the best-case scenario is that banks rapidly elevate their deposit bait as they pay up for deposits. They take the net interest income hit to do that, but they stabilize their funding mix. The more concerning scenario is that they don’t and they see deposit flight, and you end up in the same scenario because a lot of banks are carrying similar marks. Either way, the outcome is not great.”
See also: Signature Bank in NY closed by regulators