How SVB’s failure 3 months ago has changed banking (and how it hasn’t)

Three months ago, the U.S. found itself in the middle of its biggest banking crisis since 2008, as Signature, Silvergate, and Silicon Valley Bank all collapsed in a couple of weeks. SVB’s collapse, which happened nearly overnight after an extraordinary run on the bank, felt especially consequential, given its size—it had more than $200 billion in assets—and its importance in the ecosystem of Silicon Valley, where for many years it had been a key lender to tech and biotech startups.

Venture capitalists and other SVB depositors took to social media to warn that disaster loomed if the government didn’t step in and guarantee all bank deposits, including those over the FDIC-guaranteed limit. Fear that SVB’s collapse would spark contagion drove down the stocks of other so-called regional banks, many of which also had to deal with skittish depositors pulling out money. And the crisis gave rise to a lot of chin-wagging about the future of regional banks more generally.

All of which raises an obvious question: three months on, what impact, if any, has Silicon Valley Bank’s demise actually had? Has anything really changed as a result?

Shrinking credit lines, higher rates

The simple answer to that question is yes. In terms of how banks do business, SVB’s collapse and the broader financial turmoil that beset regional banks amplified risk aversion on the part of bank executives and loan officers, leading to a tightening of lending standards, particularly to small- and medium-sized businesses.

This was, to be sure, a process that was already well underway at the beginning of the year. But according to a quarterly Federal Reserve survey of loan officers, almost half of U.S. banks put stricter loan standards in place in the past three months, and more than half anticipate further tightening lending to small businesses in the months ahead. That means shrinking existing credit lines, making smaller loans, and making fewer loans overall. And with rates on U.S. Treasuries above 5%, companies that can get loans are going to be looking at interest rates in the 8% range.

The U.S. economy and the U.S. job market have, of course, remained remarkably resilient over the past year, even as the Fed has hiked interest rates aggressively in an attempt to stamp out inflation. So it’s possible that companies will shrug off tighter lending standards, too. But all things being equal, less lending should translate into less expansion, less hiring, and slower economic growth (which, to be sure, may be exactly what the Fed wants).

Lending standards would likely have gotten tighter even if SVB had managed to survive, if not to the same degree. But a direct and immediate consequence of its failure, and the attendant anxiety around the health of regional banks it created, was depositors fleeing regional banks toward what they perceived as safer alternatives. Here, again, this was something that started at the beginning of the year, but it accelerated in the wake of SVB’s collapse, with hundreds of billions of dollars of deposits moving.

Regional banks lose out to big banks

This has both weakened regional banks—in early May, First Republic Bank, which was actually bigger than SVB, also collapsed, in part because it had lost 40% of its deposits—and made big banks even bigger. A recent study by the Federal Reserve documented “an unprecedented flight to safety of deposits from regional banks toward large banks,” noting that big banks actually were able to keep bringing in deposits even though they lowered the interest rates they paid to depositors. And SVB’s collapse had a lot to do with this—in the week after it went under, the gap between the growth rate in deposits at large banks and at regional banks was the highest ever recorded.

SVB’s demise, then, has helped give us a more risk-averse, and a more consolidated, banking sector. It will also most likely lead to a more regulated sector—the Federal Reserve now plans to increase capital requirements for large banks, and to apply those standards to banks with $100 billion or more in assets, where previously they had only applied to banks with $250 billion or more in assets.

These changes are not trivial. And yet what’s most striking about Silicon Valley Bank’s collapse isn’t how much has changed, but rather how much hasn’t, and how quickly we seem to have put the crisis behind us. After all, in the wake of SVB’s and then First Republic’s collapses, there was a lot of talk of this being a systemic crisis for regional banks, and a lot of concern about spillover effects from the crisis into the tech sector and the economy as a whole. Three months later, though, most of those concerns seem to have been forgotten.

Was SVB uniquely vulnerable?

The stock market, obviously, has shrugged off any worries—after tumbling right after SVB went under, it’s up 12% in the months since. And while the regional-bank index is still down sharply since the beginning of the year, it’s risen roughly 20% since early May.

Some of this, to be sure, is the result of the actions the FDIC and the Fed took to resolve the bank failures and backstop depositors, which limited the risk of contagion. It’s also true that Silicon Valley Bank was uniquely vulnerable to a bank run because its business was so highly dependent on corporate customers in one industry, and because it had done a very bad job of managing risk. So, its problems were in some ways idiosyncratic, rather than being emblematic of regional banks as a whole.

Even so, SVB’s failure did expose real issues with the way many regional banks do business. The regional-bank model has been predicated on the idea that cultivating strong relationships with depositors will keep them loyal, meaning that they won’t move their money to other institutions simply because they can get a higher interest rate. But the combination of technology—which makes it so much easier to move money—and a boom in competition from financial institutions offering high interest rates has called that assumption into question. And it’s not really clear regional banks have a good long-term answer to that problem.

It would be overstating things to say we’re in the eye of the hurricane, but it does feel as if the forces that whipped up the storm that sank SVB and First Republic are still out there. The question is whether regional banks have figured out how to batten down the hatches in order to avoid getting sunk next time around.