Despite the federal government stepping in to save members of recently collapsed banks, including the Silicon Valley and Signature banks, many remain anxious and question if their money is safe in their financial institutions. They wonder, in light of the ripple effect created on major banks and smaller, regional banks alike, what the failures mean to their businesses, the economy, and the government.
Some strategists expect more issues — but not a full-blown crisis — in the banking sector. Jeffrey A. Henson of Robinson Bradshaw in Charlotte recently spoke with Lawyers Weekly about these issues and more.
Henson, who chairs his firm’s finance and capital markets practice group, focuses in areas such as community banking, corporate and commercial, energy, and finance and capital markets. He represents senior leaders and borrowers in connection with domestic and cross-border leveraged and investment-grade financings, mainly concentrating on investment-grade acquisition financings.
Henson graduated from the U.S. Naval Academy in 1985 with a bachelor’s degree in political science before going on to earn his law degree from Duke University School of Law in 1992.
He retired from the Navy after 13 years of service in 1998 after achieving the rank of commander.
- What concerns have you heard from your clients in light of the collapse of Signature Bank and Silicon Valley Bank?
Initially, the most pressing concern for our clients was how do they get their money back on deposit with these distressed banks and how can they manage the impact on their short-term liquidity. For small companies, it was a matter of operational survival if they could not access their cash and maintain and utilize their working capital lines of credit.
After the intervention of the Federal Reserve, the concerns expressed by our clients have now focused on the need to diversify their depositary and cash management business among multiple banks.
- What advice are you giving those clients?
It is not reasonable to expect larger companies with more than $250,000 in deposits to keep that cash among many banks to remain below the FDIC insurance cap. So, it is important that they carefully select their banking relationships with a mix of both large and regional banks, if possible.
The other key piece of advice is not to relax. The Federal Reserve was able to calm markets with the deployment of its new “Bank Term Funding Program.” But the twin wrecking balls of excessive governmental spending and the borrowing to support it, along with monetary policy that is focused on frantically raising interest rates in an effort to get the inflation ignited by excessive government borrowing and spending under control, is wreaking havoc throughout our financial system. News is breaking this evening that First Republic Bank, which as of March 9, 2023, had total deposits of $173.5 billion, is headed into receivership. So, the fear of contagion remains.
- What type of ripple effect do you believe the collapses have had on major U.S. banks and smaller, regional banks?
(1) Small and mid-sized banks in an effort to strengthen their finances will tighten lending standards and make fewer loans. This will slow down economic activity in our country.
(2) Another area of great concern is commercial real estate. Over the next five years, more than $2.5 trillion in commercial real estate debt will mature, and many of these borrowers will look to refinance that debt in a higher interest rate environment. With the valuations of many office and retail property falling since the pandemic, it is possible that a sizable number of these borrowers will be unable to refinance this debt. The recent stress in the banking system among regional banks will make this even more difficult. About 80 percent of all bank loans for commercial properties come from regional banks.
(3) Until interest rates are normalized and inflation is under control, all banks will feel some level of stress to incentivize depositors to not move their deposits. For years, in an almost zero rate environment, banks have only paid nominal interest on deposits. Now, depositors with just the click of their mobile phone can move their deposits to a money market fund paying almost 5 percent in interest. Banks can increase the interest they pay on deposits, but that will reduce their profits and put further pressure on their stock price.
- Is there such a thing as a bank being too big to fail?
I hope that we do not find out! Silicon Valley Bank and Signature Bank were the second and third largest bank failures in U.S. history, with each bank having nominal assets of over $100 billion respectively at the time of their failure. One thing is clear: These bank collapses will lead to more deposits leaving small and mid-sized banks and being moved to our nation’s largest banks, resulting in the biggest banks becoming even bigger.
- The current administration has indicated that it would ask Congress and banking regulators to “strengthen the rules for banks” to reduce the risk of bank failure. What might this look like?
It remains to be seen as the post-mortems are still being written regarding Silicon Valley Bank and Signature Bank. But we can count on two broad areas of focus: (1) our largest regional banks will be subject to higher capital and liquidity requirements much like our nation’s largest banks, and (2) the FDIC will be far more assertive in its supervisory duties of banks in the future. •