By LAURA ELDER The Daily News
Executives of financial institutions in Galveston County this week were working to calm jitters among their customers after two of the biggest bank failures since 2008 shocked the industry in a matter of days.
Executives with HomeTown Bank, Moody Bank and Texas First Bank — all locally owned — were fielding calls and welcoming more as they sought to explain the very particular, niche problems that caused federal regulators to seize California-based Silicon Valley Bank Friday after depositors rushed to withdraw their funds all at once.
The only larger failure in U.S. banking history was the 2008 collapse of Washington Mutual. New York-based Signature Bank was seized by regulators late Sunday in the third-largest failure in the United States, causing more industry and consumer anxiety.
Loan defaults are one of the biggest risks to commercial banks, but that’s not what happened in the case of Silicon Valley Bank and Signature. The banking crisis that unfolded in the past few days is related to serving the risky world of tech startups and cryptocurrency, which led to the downfall of Silicon Valley Bank and Signature Bank, executives for the three local banks said.
“Local community banks are strong, solid and secure,” Christopher Doyle, president and CEO of Texas City-based Texas First Bank, said. “There’s no reason for anyone to be worried about money in our bank.
“Those few examples of failures just have nothing to do with banks like Texas First, HomeTown and Moody.”
And none of the local banks are in the position Silicon Valley Bank found itself in when the crisis began. Silicon Valley had been hit hard both by a rough patch for technology companies in recent months and the Federal Reserve’s aggressive moves to increase interest rates to combat inflation, local community bankers and industry observers said.
SECURITIES FIRE SALE
Silicon Valley Bank held billions of dollars in Treasuries and other bonds, which isn’t unusual for most banks because they’re considered safe investments, industry experts say. But the value of the previously issued bonds began to fall because they pay lower interest rates than comparable bonds issued in today’s higher interest rate environment, according to The Associated Press.
Normally, that wouldn’t be a problem either because bonds are considered long-term investments and banks aren’t required to book declining values until they’re sold. Such bonds aren’t sold for a loss unless there’s an emergency, according to The AP.
But Silicon Valley had an emergency.
“Its customers were largely startups and other tech-centric companies that needed more cash over the past year, so they began withdrawing their deposits,” according to The AP. “That forced the bank to sell a chunk of its bonds at a steep loss, and the pace of those withdrawals accelerated as word spread, effectively rendering Silicon Valley Bank insolvent.”
Customers of Silicon Valley Bank were withdrawing deposits beyond what it could pay using its cash reserves, and so to help meet its obligations the bank decided to sell $21 billion of its securities portfolio at a loss of $1.8 billion, according to reports.
The drain on equity capital led the lender to try to raise more than $2 billion in new capital, Vidhura S. Tennekoon, assistant professor of economics at Indiana University told independent news organization The Conversation.
“Silicon Valley Bank and Signature Bank failed with enormous speed — so quickly that they could be textbook cases of classic bank runs, in which too many depositors withdraw their funds from a bank at the same time,” Tennekoon said.
New York-based Signature faced a crisis of confidence after regulators seized Silicon Valley Bank. Signature also was reeling from a bet on crypto banking that foundered after the sector imploded and banking regulators cracked down on lenders’ exposure to digital assets, The Wall Street Journal reported.
Earlier this month, Silvergate Capital announced it would wind down operations and voluntarily liquidate its bank after a collapse in the crypto market saw billions in deposits depart in recent months, according to reports.
Since Friday, the banking industry and the federal government have sought to contain “contagion,” or a panic-inspired run on other banks when consumers lose confidence.
Galveston-based Moody Bank President and CEO Vic Pierson said social media played a big role in the run on the failed banks.
“With all the social media, there’s just a lot of misinformation out there and it spooks the consumer,” Pierson said.
Moody Bank this week received calls from anxious customers and has worked to ease fears, reminding them the bank has been around since 1907 and has a long, conservative history, surviving everything from storms to economic crisis, Pierson said.