By Rosemary Ford, Melanie Plenda, 

NH PBS/Granite State News Collaborative

March 24, 2023

Bank problems have dominated newscasts in recent weeks. Headlines about banks being closed, bailouts, and stock price swings can create a lot of anxiety for the average person. Should we be concerned?

On this week’s episode of The State We’re In, host Melanie Plenda talks to Tom Sedoric, Executive Managing Director of the Sedoric Group, and journalist Michael Kitch, a regular New Hampshire Business Review contributor, about the what's really going on in the banking industry and whether or not we should be worried.

The transcript has been lightly edited for space and clarity

Melanie Plenda:

Though Silicon Valley Bank has no branches in New Hampshire, some Granite Staters may have accounts tied to that institution. In a basic sense, what happened there?

Tom Sedoric:

Well, a combination of factors contributed to that bank's failure. And in fact, there are New England tentacles of that bank – they made an acquisition, I think in 2011, of Boston Private Bank and actually tried to branch into New Hampshire at one point. So it is likely that some New Hampshire residents have exposure to what is now a branch of Silicon Valley in Boston Private. In essence, what happened is a wrong bet on interest rates. There was a dramatic rise in interest rates over the last few months, and this bank was ill-prepared. That, and the importance of technology and the smartphone, which created essentially an electronic run. People were not lined up at their teller window getting their deposits, but $14 million left in one day alone because of smartphones, Twitter, and technology.

Melanie Plenda:

Other banks have also had troubles over the past few weeks. Briefly, can you tell us about what happened with Signature Bank, First Republic and Credit Suisse? Are those troubles related?

Tom Sedoric:

Indirectly, yes. It's a mismatch of assets and liabilities. Your viewers probably need to remember that their deposits in a bank are a liability of that bank – unless they can put it to work in a mortgage or a loan to a business or to buy government bonds, the bank can't make any money. So there was a mismatch, and when interest rates moved dramatically in 2022, from basically zero to 4%, that strained a lot of balance sheets for a lot of banks. The others that you just mentioned are all slightly different. One was involved with cryptocurrency allegedly, but there's also a report that Mike and I have talked about privately that says there are another 180 banks out in the United States that may have similar characteristics on their balance sheet to what happened to SVB.

Michael Kitch:

I think Tom is absolutely right. This all started with the rise in interest rates, and the fact that the SVB had invested heavily in long term bonds, which lost their value as interest rates rose. The interesting thing to me about SVB, the importance of digital banking or electronic banking, is that this was the second largest bank failure in American history. In 2008 when Washington Mutual failed, it took eight months; SFB failed in two days. And that, to me, indicates that there's a new risk to banking, and it's probably called social media.

Melanie Plenda:

Let's talk about the role of the media, and also social media, here. What impact do you think these might have had in what happened with these banks? Obviously news outlets need to report what's happening, but how much did that contribute to a sort of panic for people to go run on the bank? Can you just explain that link between the sort of panic and what causes a run? 

Michael Kitch:

Well, in Silicon Valley's case, this bank operated in a kind of niche market with a lot of high tech startups in a relatively geographically-confined area where there were lots of venture capitalists and lots of startup firms. My guess is that news traveled very fast through that community, whether it be about how a startup was doing, or how the bank was doing, and with the social media that news traveled very fast. It was kind of a close-knit community, and it didn't take long for the problems of that bank to become pretty widespread.

The link primarily was that SVB had over 90% of its deposits above the limit of deposit insurance – in other words, they were uninsured deposits. Much of it from venture capitalists. When the news spread, that money pulled out and I think they lost $42 million in deposits in the course of hours. It all happened very rapidly. And it was because of the rapid spread of expressions of concern by investors and others in that community of customers. There was nothing they could do to stop it.

Melanie Plenda:

How is what's happening now different from what happened in New Hampshire in the early '90s or in 2008-2009?

Michael Kitch:

A totally different situation. If you go back to the 1980s, the New Hampshire banking scene was very different than it is today. For a variety of reasons, there emerged about seven or eight very large bank holding companies in New Hampshire created primarily by mergers and acquisitions. They converted from mutual banks to stock banks so that they had shareholders, and the shareholders wanted earnings. And at the same time, there was the prospect, if legislation succeeded, of interstate banking. And these banks essentially grew very rapidly, dressed themselves up to be sold to larger out of state banks when the interstate banking law passed, and aggressively built up their loan portfolios. Interstate banking didn't pass. So you had seven or eight large banks trapped in a very small market with intense competition for both deposits and loans. And the effect was to drive up the cost of deposits as they competed, and to drive down the cost of loans because they all needed loans on the books to create earning assets. The profit margins got squeezed, they made all kinds of reckless investments primarily in commercial and residential real estate, and it was just an untenable situation. And on October the 11, 1991, seven banks in New Hampshire were closed within a day. That was largely the result of the change structure of the industry in New Hampshire rather than the kinds of issues we're talking about today. This is a very different situation, and New Hampshire today is a very different place in terms of banking, a very different place.

I think 2008-2009 was also a different situation because that was a systemic banking crisis that spread around the world. New Hampshire probably got away a little easier in 2008 than it had in 1991, because most of the banks in New Hampshire were smaller. They weren't involved as deeply in the mortgage crisis that affected the big banks in New York and the derivatives markets, and all those very high risk investments. So although New Hampshire's went through the depression and in 2008, certainly, it didn't have the devastating effect on the banking industry per se that occurred in 1991.

Tom Sedoric:

Michael captured that beautifully. I would say that in 2008-2009, essentially the plumbing of the entire financial system froze up. That is not the case today. This is an asset liability mismatch due to the dramatic rise in interest rates. To give a sense of how dramatic the rise was, what happened in four months was supposed to happen over a 4-5 year period. And in 2022, we had the worst bond market – meaning when interest rates rise, bond prices fall, and they did – we had the worst bond market since 1840. That gives you a little context for how bad it really was.

Melanie Plenda:

How does this impact consumers — just the average bank customer? Should the average person be worried about their bank? What advice or tips do you have for people who may be worried?

Tom Sedoric:

Probably not. The average person probably doesn't have more than $250,000 at their financial institution, so they probably are covered. I also think there's a bit of a fallacy that most depositors think the FDIC has this huge pot of money sitting on the sidelines to bail out the banks. They don't. It is ultimately an obligation of the federal government, meaning you and me the taxpayers. And that was certainly the case in 2008-2009. But we don't see systemic failure here as we did then. I did mention earlier about the 180 other banks that may or may not have problems – time will only tell about how bad or how good it's going to be. But I think we're a little early in the game. I think the important thing your viewers can take away from this is, don't be afraid to ask your banker hard questions. How am I covered? Am I protected? Are you taking care of me? And remember, ultimately, the banks are in the business of value extraction, not value creation. So it's true now as it always has been – buyer beware – so know what your bank is doing with your deposits and don't be afraid to ask questions.

Michael Kitch:

New Hampshire is an interesting case. I believe there are 43 banks in New Hampshire – only 16 of them are state-chartered banks under the supervision of the New Hampshire banking department. But most of those banks are mutual savings banks, they serve their communities, they're governed by directors drawn from the community, and they do basic, what used to be called “plain vanilla banking”. For most individuals, families and households, a relatively small bank that lends within its community to the people and businesses that it's close to is a good choice. That would be my advice. A good example was going back to October 1981: when the big banks failed, the smaller banks flourished because all the depositors went to the smaller community banks.

Melanie Plenda:

President Biden offered some relief for depositors, not investors. Can you explain what the difference is? What impact will that have?

Tom Sedoric:

I don't think it's known yet what that means. I am not Mr. Biden's advisor, but I would have not said anything quite frankly. I would have let the news play out bfore I came forward. I know that Janet Yellen, Secretary of the Treasury, has been very outspoken about the backfilling that they want to do. They've created some unique circumstances to protect the banks and I think that is, in fact, creating some calmness in the marketplace.

The State We’re in a weekly digital public affairs show is produced by NH PBS and The Marlin Fitzwater Center for Communications. It is shared with partners in the Granite State News Collaborative, of which both organizations are members.