What’s Happening to the Banking Sector?
Given recent upheavals in the banking sector, we sat down with Jerry H. Tempelman—who covers financial institutions as a Vice President and Fixed Income Analyst for Mutual of America Capital Management LLC—to get insights into what’s going on and how it’s affecting financial markets.
Mutual of America: A few prominent banks have failed recently—Silicon Valley Bank, Signature Bank, Credit Suisse. Is this the start of a global financial crisis?
Jerry Tempelman: The current environment is not shaping up to be like the global financial crisis of 2008, which was far more widespread than what we’re seeing today. The problems at the banks you mentioned were specific to significant issues that each of those individual banks faced. In general, banks fail because of problems in their loan portfolio. The global financial crisis was a good example of that. Back then, banks and other financial intermediaries extended too much credit to the housing sector, creating a financial bubble. When that bubble finally burst, many financial institutions that had credit exposure to the housing sector ended up in trouble themselves.
Mutual of America: So how are the issues for the failed banks different now?
Jerry Tempelman: Today’s problems are much more specific to each bank. Take, for example, Silicon Valley Bank (SVB), which had a fairly concentrated business, namely, providing financial services to venture capital-related businesses. In recent years, that industry has done well, and SVB found itself flush with deposits, much of which it invested in longer-dated Treasurys and other fixed income securities. The reasons for SVB’s failure are complex, but, in brief, when the Federal Reserve began raising interest rates last year in an effort to tame inflation, and the financial markets grew volatile, those businesses began drawing down their deposits at SVB to help finance their operations. SVB, in turn, had to sell some of its securities holdings, which had incurred losses due to the rise in interest rates, but ultimately, it was unable to meet the swiftly growing demand by depositors seeking their money.
Mutual of America: Could there be any spillover effects from these banks that might affect otherwise healthy banks?
Jerry Tempelman: Yes, but largely in an indirect way. Soon after it became apparent that depositors had lost confidence in SVB and were trying to withdraw their money, clients of some other regional banks, especially on the West Coast, began calling into question the financial health of their own banks. But the Federal Reserve stepped in and created a new lending facility so that banks could borrow from the Fed and meet the deposit outflows they may have been experiencing. Since then, the Fed has provided extra liquidity almost exclusively to banks headquartered in its San Francisco and New York districts, where SVB and Signature Bank were located. Outside of those two districts, the general public has not lost confidence in regional banks.
Mutual of America: The largest U.S. banks seem to have fared just fine this time around. Why is that?
Jerry Tempelman: The banking system, as a whole, is in much better shape today to endure a crisis than it was going into the 2008 financial crisis. In general, banks are better capitalized and more liquid, allowing them to continue lending to investors. They also have much better risk-management systems, and their operations are more diversified. As a result of these and other measures, most U.S. banks are in a much better position to face a financial crisis or recession than they were in the past.
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Mutual of America Capital Management LLC is an indirect, wholly owned subsidiary of Mutual of America Life Insurance Company.