Skip to main content
PGIM Quantitative Solutions LogoPGIM Quantitative Solutions Logo
  • Learn About Us
    • Our Solutions
    • Our History
    • The Team
    • Diversity, Equity & Inclusion
    • Contact Us
  • All Insights
    • ESG
    • Market Views
    • OUTcomes Series
  • ESG Overview
    • ESG Insights
    • ESG Policy
    • Stewardship and Governance
  • Overview of Solutions
    • Quantitative Equity
    • Multi Asset
    • PGIM Wadhwani
    • PGIM DC Solutions
  • Client Log In
  • Careers
Bank
Commentary

What's Next for Regional Banks?What'sNextforRegionalBanks?

By Edward L. Campbell, Marco Aiolfi, Lorne Johnson, Manoj Rengarajan, Peter Vaiciunas & John Hall — Mar 14, 2023

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
Download PDF

Share

Silicon Valley Bank (SVB), a commercial bank headquartered in California, collapsed on March 10, resulting in the second-largest bank failure in US history. The firm had announced a plan last Thursday to raise $2bn in capital, but failed to find new sources, sending its stock plummeting 60% with another 60% pre-market decline early Friday morning. The bank was subsequently shut down and put in FDIC receivership. While SVB is the first US bank to fall into crisis as a result of the current Federal Reserve (Fed) rate hike cycle, other interest rate sensitive sectors of the economy, such as housing, have also been slowing following the Fed’s aggressive posture, which has taken the fed funds rate from 0-0.25% in early 2022 to 4.5-4.75% currently (as of 3/14/2023).

Most SVB deposits were invested in longer-dated bonds and mortgage-backed securities, which resulted in significant unrealized losses as long-term interest rates rose in response to Fed tightening. Moreover, the high share of uninsured depositors—largely composed of corporations and venture-backed startups—resulted in a deposit base that was especially prone to pull deposits in response to these concerns.

On March 12, US regulators announced all SVB depositors would be made whole. The operation will not be directly funded by taxpayers; instead, a special assessment will be levied on banks. In addition, the Fed announced a Bank Term Funding Program (BTFP) that will lend to eligible institutions at favorable terms.

Broadly, the failure of SVB, Signature Bank, and Silvergate Bank over the past week appear to be the result of deposits concentered in the technology or crypto sectors, as well as classic mismanagement of assets and liabilities with an unusually large proportion of assets held in fixed income securities instead of traditional banking loans.

The new BTFP facility, along with the FDIC’s commitment to protect all depositors, will likely provide assurance to depositors and help curb the outflow of deposits. Still, we expect depositors at smaller institutions will reassess the safety of their capital, despite the assurances from the Fed and FDIC. Significant deposit moves to larger and more stable tier-1 banks would have ramifications on the solvency of smaller institutions. A key risk is that a loss of depositors’ confidence could result in capital flight and evolve into a collapse in counterparty confidence.

On the assets side, the good news is that the current predicament is due to a duration mismatch (which is relatively easier to fix), rather than credit quality (which was the case during the Global Financial Crisis). Banks’ unrealized losses have largely been driven by the unprecedented rise in policy rates and not by poor lending decisions. The Fed’s funding window eases the liquidity pressures on banks with further room to be extended as needed.

In our view, the immediate economic fallout appears to be less than previously feared, amid significant uncertainty about the status of uninsured deposits. However, bank lending standards have been tightening in the past few quarters, and any further measures by banks to shore up balance sheets could result in additional lending restrictions, which would have material adverse impacts on the real economy.

Despite the additional complexity of bank failures, the Fed is still combatting significant inflationary forces. While the immediacy of a banking crisis could give the Fed an excuse to pause hikes or dial back rate increases while monitoring the stability of financial institutions, the Fed will likely refocus on inflation as market jitters ease.
In the short term, markets are likely to remain apprehensive about banks with similar vulnerabilities to SVB, which will likely keep banks with large uninsured deposit bases, larger retail/concentrated deposits, or with a significant proportion of Held-to-Maturity securities under pressure.

Therefore, we think the focus in the coming weeks is likely to be how successful the Fed and others have been in maintaining confidence among depositors and investors in the US banking system, and to what extent the responses by banks to the fast-changing environment could negatively impact the real economy. Regardless, the consequences of the Fed’s interest rate hikes, intended or not, are being increasingly felt in the economy.

Download PDF
  • By Edward L. CampbellCo-Head of Multi Asset, PGIM Quantitative Solutions
  • By Marco AiolfiCo-Head of Multi Asset, PGIM Quantitative Solutions
  • By Lorne JohnsonHead of Multi-Asset Portfolio Design, PGIM Quantitative Solutions
  • By Manoj RengarajanCFA & Portfolio Manager, PGIM Quantitative Solutions
  • By Peter VaiciunasPortfolio Manager, PGIM Quantitative Solutions
  • By John HallCFA & Vice President, PGIM Quantitative Solutions
  • About Us

    • Overview
    • Our History
    • The Team
    • Inclusion & Diversity
    • Contact Us
    • Careers
  • Insights

    • All Insights
    • ESG
    • Market Views
    • OUTcomes Series
  • ESG

    • Overview
    • Insights
    • ESG Policy
    • Stewardship and Governance
  • Solutions

    • Overview
    • Quantitative Equity
    • Multi Asset
    • PGIM Wadhwani
    • PGIM DC Solutions
PGIM Quantitative Solutions Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • Cookie Preference Center

For Professional Investors only. All investments involve risk, including the possible loss of capital.

The content and materials presented here are for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM Quantitative Solutions LLC (PGIM Quantitative Solutions or PGIM Quant), formerly known as QMA LLC, is an SEC-registered investment adviser and a wholly-owned subsidiary of PGIM, Inc. (PGIM), the principal asset management business of Prudential Financial, Inc. (PFI) of the United States of America. Registration with the SEC does not imply a certain level of skill or training. PFI of the United States is not affiliated in any manner with Prudential plc incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. 

In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418). In the European Economic Area (“EEA”), information is issued by PGIM Netherlands B.V. with registered office: Gustav Mahlerlaan 1212, 1081 LA Amsterdam, The Netherlands. PGIM Netherlands B.V. is authorised by the Autoriteit Financiële Markten (“AFM”) in the Netherlands (Registration number 15003620) and operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. 

These materials are issued by PGIM Limited and/or PGIM Netherlands B.V. to persons who are professional clients as defined under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II). PGIM Quantitative Solutions, PGIM Limited and/or PGIM Netherlands B.V. are indirect, wholly-owned subsidiaries of PGIM. These materials are not intended for distribution to, or use by, any person in any jurisdiction where such distribution would be contrary to local or international law or regulation.

In Japan, investment management services are made available by PGIM Japan, Co. Ltd., ("PGIM Japan"), a registered Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 (paragraph (a) to (i) of the Securities and Futures Ordinance (Cap.571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a Singapore investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South Korea, information is issued by PGIM Quantitative Solutions, which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.

PGIM, PGIM Quantitative Solutions logo and the Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.

© 2023 PGIM Quantitative Solutions. All Rights Reserved.
 

You are viewing this page in preview mode.

Edit Page