Silicon Valley Bank’s deposits ‘accounted for 90% of funding, which was very high’: Analyst

Argus Research Director of Financial Services Stephen Biggar discusses the state of the U.S. banking system in the wake of Silicon Valley Bank’s collapse.

Video Transcript

SEANA SMITH: We're about a minute away from the closing bell. And taking a look at where things stand in the final minute of trading, the Dow just around 300 points to the upside, S&P up about 1.3%. The NASDAQ up about 1 and 1/2% today. Taking a look at the sector action, eight of the 11 sectors trading to the upside. The leadership there from energy, the XLE up just over 3 and 1/2%. We're also seeing some pretty solid gains from consumer discretionary, communication services.

But Dave, a lot of the focus, once again today, is on the financials. XLF, at least for today, regaining some of that it had lost over the last several trading days, up just over 2 and 1/2% today.

DAVE BRIGGS: And the regional banks, we do have a look at the regional bank ETF. And it's up about five today, but big picture still down 25% over the last month. So yes, certainly gaining back some of those losses. And look at First Republic, up considerably today about 30%, but again, down 45% over the last five days. So it really is relative considering, yes, gained some back, but overall, it's been a very tough weekend or month for the regionals. And the question is, what will the markets do upon the Fed news tomorrow? And there's your closing bell.

SEANA SMITH: Exactly. All eyes will be on that Fed decision 2:00 PM Eastern time tomorrow. Of course, we will have that for you here at Yahoo Finance. But this wraps up today's trading day, all three of the major averages ending in the green ahead of that highly anticipated announcement tomorrow, this market check sponsored by Tasty Trade. And as we check out the final trades of the day, you're looking at the Dow closing up 317 points, S&P up just over 1%, the NASDAQ the leader today, up just about 1.6%.

DAVE BRIGGS: JPMorgan Chase CEO Jamie Dimon is reportedly leading talks with the nation's other big banks to stabilize their beleaguered regional counterpart First Republic Bank. But after the collapse of Silicon Valley and Signature Banks sent shockwaves through the sector, are America's biggest banks still too big to fail? To discuss how the major players have weathered this crisis, we're joined by Argus Research director of financial services research, Stephen Biggar. Nice to see you, sir. How would you characterize the health of our big banks?

STEPHEN BIGGAR: Well, very strong, I think, honestly. This episode has highlighted that the strength of the big banks, that some of the weaker players where you have some questions about deposit diversification have led to a flood of deposits into the larger banks, and, you know, I think for good reason, frankly. You've got much more stringent capital requirements and oversight, and more importantly, millions of deposits-- depositors, rather-- relative to some of the smaller banks, in particular, a Silicon Valley Bank, which was tripped up on just that scenario.

SEANA SMITH: Stephen, is there any risk that we could see another bank fail?

STEPHEN BIGGAR: Well, you know, historically, bank failures have been rather low, even to nonexistent. FDIC insured banks failures were zero in 2022 and 2021. We had four each in 2019 and 2018. So, still very, very low possibility. Your chances, I think, are a little better at the roulette table than they are to find the next bank that will fail.

So we've run a lot of screens relative to our banking universe and the S&P 1,500 banks. And there were a couple of things that Silicon Valley Bank really had that stood out as problematic. And the one thing I talked about already was that deposits accounted for about 90% of funding, which is very high relative to about 2/3 for the average bank. And they also had a depositor base that was deeply concentrated in unprofitable startups. And those were unable to access the capital markets. We've had a dearth of IPO activity. And so, basically, winding down deposits from buyer fundraising, just to fund their operations.

And of course, lastly, they made a big mistake in terms of the flood of deposits that came in post-pandemic during a very healthy period of capital raising by venture capital into startups. And that money was just not invested well. It was invested in zero risk treasuries, but they took on a lot of duration risk. And we have just been hard pressed to find any other banks that fit that profile that would be subject to the same type of thing.

DAVE BRIGGS: And these are the reasons you believe SVB was overblown in terms of its scale. Do you think, nonetheless, it will lead to more regulation? Should it?

STEPHEN BIGGAR: Well, I think that's the inevitable outcome here. There's typically a knee jerk reaction by policy and legislators to crack down on the industry when a mistake of a single or a few come up here. So, yeah, I think the one thing that the really stress test did not capture this time-- and a lot has been said about, well if Silicon Valley had been a bank that was subject to the more stringent stress test, would it have passed?

And I think the answer has been yes universally, but what they seem to miss is that the severe stresses is always about a big decline in the economy. You've got interest rates move to 0.75 on the 10-year. They drop a lot. Equity prices move down a lot, commercial real estate prices. You've got these shocks to the system that are traditional in a big downturn. What they don't account for is what happens when you have a pandemic and a flood of fiscal stimulus and then zero interest rate policy from the Fed for too long, and that creates inflation and then the higher rates-- interest rates that come along.

So I think the tests have to be better adapted to what happens to bank balance sheets when there is a big rise in interest rates and what that does to the value of the investment portfolios. So I think we'll see that. We'll probably see higher deposit insurance. I think there's a lot of-- seems to be some growing interest in raising the deposit minimums, which the last [INAUDIBLE] raised from 100,000 to 250 after the-- or during the crisis of 2008. So I think there's arguments to be had here.

Unfortunately, the outcome could be less profitability for the banking industry at large, though, these higher capital cushions, greater cost of raising capital, and some other legislative and policy items.

SEANA SMITH: Yeah, Stephen, I wanted to ask you a little bit about that, just in terms of the smaller banks, the medium-sized banks, their ability to compete in that sort of environment, if, of course, we do see more regulation. And then is that going to prompt more consolidation within the space?

STEPHEN BIGGAR: Well, it likely will. We have some of not just the smaller, but what I would classify as weaker banks here that have been identified being swallowed up by larger competitors. In the case of the Silicon Valley, well, some of the parts will find new homes, Signature Bank and First Republic at the same. But bank consolidation has been a theme. It may not seem like an everyday theme, but clearly moving back-- and I've been a bank analyst for about 30 years. And in the early 1990s, we had 10,000 FDIC insured commercial banks.

Today, we have 4,700. And we crossed below the 5,000 mark just in 2021. So that's more than a halving in the number of banks in 27 years. So I think this trend will continue. The small will get smaller, and the large will get larger. Interestingly, you would hope that they also get safer the larger they get. And as we've seen something like Silicon Valley, the 16th largest bank in the US had major issues. But they go deeper than the surface of asset size, as we see. And I think the market's got a real strong education recently on deposit diversification and capital cushions and investment portfolios available for sale and held to maturity.

SEANA SMITH: Steve Biggar, great to have you of Argus Research. Thanks so much for hopping on with us.