Washington is watching the closure of Silicon Valley Bank but sees the current troubles as unique to the institution, a leading expert on bank regulation said Friday.
The unique aspect of Silicon Valley is that is is exposed to high-tech venture capital, said Jaret Seiberg, an analyst at TD Cowen.
“We believe Washington is watching, but does not see a broader crisis looming,” Seiberg said, in a note to clients.
On Friday, Treasury Secretary Janet Yellen voiced concern for “a few banks” when asked about Silicon Valley.
Silicon Valley was closed Friday by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corp. as a receiver.
Former Fed Vice Chair Donald Kohn said he did not think the Fed is worried about the banking system cracking.
“The banking system is very safe. They’ve done stress tests on the capital, on the liquidity. New regulations put in place since the global financial crisis makes the system much much safer,” Kohn said, in an interview on CNBC.
Kohn said he thought that examiners at the San Francisco Fed would be asking questions about the venture capital industry.
“I am sure that Mary Daly [the president of the San Francisco Fed] has people all over the venture capital industry now trying to figure out what is going on and what the interconnections are and possible contagions might be… even if not through the banking system, are they somewhere else,” he said.
Ian Katz, managing director at Capital Alpha Partners, said regulators have confidence in the banking system overall, particularly the largest banks.
He said Washington had concerns about the relations between banks and the crypto industry and about some banks that have deposits that are seen as volatile.
“A certain number of banks have very volatile deposits. That is probably what regulators are looking for,” Katz said.
Seiberg said that the banking system is getting its first test with the unwinding of the deposit surge after taxpayers received federal government stimulus checks during the COVID crisis.
As banks face withdrawals, they have to sell securities that have fallen in value because of higher interest rates.
“We believe the risk is that the market and customers overreact to these examples. That could lead to deposit runs on other banks with unrealized losses on securities,” Seiberg wrote.
In a speech late last month, FDIC Chairman Martin Gruenberg said the overall U.S. banking system continues to face “significant downside risks” from the effects of inflation and rising market interest rates.
“Additional short–term interest rate increases combined with longer asset maturities may also affect bank balance sheets in coming quarters. Unrealized losses on available–for–sale and held–to–maturity securities remained elevated at $620 billion,” Gruenberg said.
