Bank Liquidity Crisis 230320 PDF

“Liquidity is an illusion… It’s always there
when you don’t need it, and rarely there

when you do.”
Michael Milken
The Bank Liquidity Crisis: Day 12

March 20, 2023
Sean Ryan
sean.ryan@factset.com
Crisis in Confidence Persists
Regulators Have Largely Acted Constructively. In our view, regulators have broadly acted helpfully since
Silicon Valley’s mid-quarter update and failed recapitalization lit the fuse on the current banking crisis. The
guarantee of uninsured depositors at Silicon Valley and Signature, the Swiss regulators’ support for Credit
Suisse, and the joint central bank action to ensure USD liquidity, appear to have helped limit the failures to a
small number of institutions thus far.
Yet It Has Not Been Sufficient to Calm Markets. While contagion might have been much more severe
absent regulators’ actions, shuttering Silicon Valley on March 10 didn’t halt the run on Signature, guaranteeing
uninsured depositors at both banks failed to draw a line under the crisis in the U.S., and the Swiss backing of
Credit Suisse produced a brief rally in that stock but ultimately only bought the bank enough time to negotiate
a fire sale to UBS.
What will restore confidence? Leveraged financial institutions require the confidence of their customers and
counterparties; without it, as has just been demonstrated, they collapse quickly. A group of mid-sized U.S.
banks has requested that the FDIC extend insurance coverage to all deposits for a period of two years; this
might help, though how it would be financed, and what precedents and incentives it would create are large
open questions. In the best case, it might buy time for structural reforms while mitigating the further
oligopolization of the industry. Regrettably, however, we just don’t see a silver bullet anywhere that can quickly
and definitively resolve this situation.
What We’re Watching

In no particular order:
Credit agency downgrades. Last week Moody’s placed several banks on review for downgrade, including
First Republic, Zions Bancorporation, Western Alliance, Comerica, and UMB Financial. Last night S&P
downgraded First Republic for the second time in a week, this time from BB+ to B+.
The weekly H.8 release. To the extent that this liquidity crisis acts as a drag on overall bank lending, it will
weigh further on the broader economy. This Friday we will get the data for the week ended March 15,
potentially showing the first effects of the crisis on aggregate bank lending.
Washington. Hearings have already been scheduled, and Senator Warren is - let us be gentle - returning to
form. That there will be meaningful changes to the banking system seems a foregone conclusion, but the
precise effects on industry structure, stability and profitability are to be determined.
Warren Buffett. Mr. Buffett has a history of lending his credibility to financial institutions in need of it, at least
when he is comfortable with the fundamentals, and the price is right. His price can be high - preferreds with a
generous yield, plus warrants, but the combination of his capital and his endorsement helped restore
confidence in Goldman Sachs in 2008 and Bank of America in 2011. Were he to make any bank investments
in the near term, the effect would presumably be similar.
First quarter earnings. Mid-April feels a long way away just now, but U.S. banks will begin reporting first
quarter results on April 14th, with JP Morgan Chase, Wells Fargo, Citigroup and PNC all scheduled to
release that morning. With luck things will have settled down by then, but if not, then the second half of April
will offer the market a detailed look at how banks have fared this month.
Copyright © 2022 FactSet Research Systems Inc. All rights reserved. FactSet Research Systems Inc. | www.factset.com
2
Worst-performing bank stocks. This isn’t a proprietary insight, of course, and the market does appear to
have thrown a few babies out with the bathwater, but broadly speaking, the universe of the worst performing
bank stocks since March 8 has included the banks that have faced the most severe liquidity crises in the
ensuing days, and without making any forecasts about any specific banks, this looks like a banks we would
want to watch closely for signed that the crisis is intensifying or (hopefully) easing. As seen in Figure 1, this
list contains some banks that are much larger than the recent failures (in the U.S.); among the key
differences is that these larger banks generally have very large retail deposit basis which have historically
proven stable during financial crisis.
Figure 1: Stock performance since SIVB’s mid-quarter update
Company Name Ticker Mkt Cap Price Performance

($Billion) Since 3/8
First Republic Bank FRC $4.2 $23.03 -80%
PacWest PACW $1.1 $9.28 -65%
Canandaigua National CNND $0.2 $95.50 -64%
Western Alliance WAL $3.4 $31.32 -56%
First Foundation FFWM $0.4 $7.60 -46%
Customers Bancorp CUBI $0.6 $18.01 -38%
Zions Bancorp ZION $4.5 $29.94 -36%
BankUnited BKU $1.6 $21.27 -36%
Comerica CMA $5.7 $43.59 -35%
Metropolitan Bank Holding MCB $0.4 $35.63 -35%
KeyCorp KEY $10.7 $11.53 -33%
UMB Financial UMBF $2.8 $58.27 -32%
Truist Financial TFC $40.5 $30.56 -30%
First Horizon FHN $8.0 $14.93 -30%
Bank of Hawaii BOH $2.0 $51.08 -30%
Synovus Financial SNV $4.0 $27.32 -29%
Huntington Bancshares HBAN $14.9 $10.34 -28%
U.S. Bancorp USB $50.5 $32.95 -28%
Veritex Holdings VBTX $1.0 $18.93 -26%
Charles Schwab SCHW $101.1 $56.41 -26%
Fifth Third Bancorp FITB $17.1 $24.95 -26%
Horizon Bancorp HBNC $0.5 $11.03 -26%
First Citizens BancShares FCNCA $7.3 $509.06 -25%
East West Bancorp EWBC $7.7 $54.62 -25%
Source: FactSet
3
Commercial real estate. The effects of rising rates on bank securities books are once again widely
appreciated. The effects on loan portfolios have gotten less attention but that may simply be a question of
timing. Commercial real estate is the dominant class of collateral in many bank loan portfolios, and while
those loans don’t get marked to market like (AFS) securities, the sharp rise in rates still has a meaningful
impact. Higher interest rates mean higher cap rates, which mean lower real estate values, which mean CRE
loan-to-value ratios will have tended to rise significantly over the past year. In other words, the prospective
loss in the event of default has increased. Thus far in this crisis, credit quality is the dog that didn’t bark, but
this risk is growing.
One immediate effect of bank stress on commercial real estate can be seen in the banks’ role as tenants
themselves. As shown in Figure 2, SVB Financial, Signature Bank and First Republic are all among the top
10 tenants for particular REITs. In fact, First Republic is the single largest tenant for Paramount Group.
Figure 2: Troubled U.S. Banks Are Top Tenants for Certain REITs
Bank (Tenant) Ticker REIT Ticker Tenant Revenue Square Feet Remaining Lease
Rank $mm % Term (Years)
First Republic FRC Paramount Group PGRE 1 $42.2 6.2% 459,882
Signature Bank SBNY Empire State Realty Trust ESRT 2 $18.2 3.4% 308,207 12.1
SVB Financial Group SIVB Cousins Properties CUZ 10 $8.4 1.2% 204,751 3.1
Source: FactSet
Consolidation. During 2008, it was common for regulators to pre-arrange the acquisition of a failing bank, so
that the formal announcement of failure included the acquisition. The quick eruption of the current crisis,
coupled with the large deposit outflows (which make it difficult for an acquirer to know what it is getting) has
meant that we have gotten failures first, but are now starting to see acquisitions of failed banks’ assets and
deposits. Figure 3 shows the ten largest U.S. banks by deposit share. In times of crisis, the 10% national
deposit cap won’t preclude acquisitions by banks over the cap – systemic stability and loss mitigation will tend
to take precedence – but national deposit share is nonetheless a factor worth bearing in mind given the
potential for accelerated industry consolidation.
Figure 3: SVB Financial and Signature Bank Were Outliers
Rank Bank Ticker Total Deposits Market

($Billion) Share
1 JPMorgan Chase & Co. JPM $2,128 11.7%
2 Bank of America Corp BAC $1,988 11.0%
3 Wells Fargo & Company WFC $1,465 8.1%
4 Citigroup Inc. C $764 4.2%
5 U.S. Bancorp USB $455 2.5%
6 PNC Financial Services Group, Inc. PNC $447 2.5%
7 Charles Schwab Corp SCHW $442 2.4%
8 Truist Financial Corporation TFC $435 2.4%
9 Capital One Financial Corp COF $399 2.2%
10 Toronto-Dominion Bank TD $388 2.1%
Source: FactSet
The remainder of this report contains comments on the individual banks most impacted by the crisis.
4
Credit Suisse
UBS acquires Credit Suisse; investor call offers little detail. Last night UBS announced an agreement to
acquire Credit Suisse for CHF 0.76 per share, or CHF 3 billion. The transaction is anticipated to yield CHF 8
billion is cost savings by 2027, by which time management expects EPS accretion. UBS enjoys substantial
downside protections, and liquidity support from the Swiss National Bank. At the same time as the investor
call, the Federal Reserve issued a joint announcement with five other major central banks (including
Switzerland’s) regarding changes to swap line operations in order to enhance USD liquidity.
On the other hand, the deal was negotiated under such time pressure that management could offer little in the
way of additional detail. While entirely understandable, it remains to be seen how this will be received by the
market. While UBS and Credit Suisse surely know a great deal about each other, the lack of time for due
diligence, and the scale of pending distractions from UBS’ existing strategy may make it difficult for UBS to
enjoy the benefit of the doubt from investors.
For UBS, staunching the outflow of deposits and AUM is the most pressing matter; Figure 4 illustrates the
erosion of Credit Suisse’s wealth management franchise in late 2022. Like the troubled American banks,
Credit Suisse was in part a story of customer asset outflows, though in this case AUM in addition to deposits.
There may be an immediate wave of outflows from customers who banked with both UBS and Credit Suisse
and don’t want their assets concentrated in a single institution, but beyond that one-off impact, with luck the
merger will enable UBS to stabilize the outflows. If not, then the real winner in this merger (beyond the stability
of the financial system) may prove to be Julius Baer.
Figure 4: Credit Suisse Lost AUM and Relationship Managers in Late 2022
CHF 900 2,000

CHF 800
1,950
CHF 700
CHF 600 1,900
CHF 500
1,850
CHF 400
CHF 300 1,800
CHF 200
1,750
CHF 100
CHF 0 1,700
1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22
AUM (billions) Relationship Managers
Source: Company filings
5
First Republic
Acquisition is most likely resolution for First Republic. The deposit of a combined $30 billion from 11
competitors (the 8 U.S. G-SIBs, plus the three next-largest banks) seems unlikely to buy First Republic
anything more than time to negotiate a sale, particularly in light of the bank’s second ratings downgrade by
S&P in a week, to B+. We note that we have never seen anything quite like the aforementioned infusion of
deposits, and while we anticipate that it will have the desired effect of buying management time to act
deliberately, we also anticipate, with regrettably high confidence, that the precedent set by the use of deposits
in this fashion will lead to catastrophe in the future.
Underwater mortgage book. First Republic has seen sharp deposit outflows like other banks (68% of First
Republic’s deposits were uninsured at year-end 2022 – an improvement from 75% at year-end 2021, but still
quite high), but while Silicon Valley had enormous unrecognized losses in the bond book, at First Republic
the mortgage portfolio is more remarkable. The unrecognized loss on mortgages (fair value less carrying
value) rose, on a tax-adjusted basis, from 15% of tangible common equity at year-end 2021 to 84% at year-
end 2022.
First Republic Will Likely Be Sold As A Single Entity. While regulators are considering selling SVB
Financial’s private bank separately from the core bank, and hiving off Credit Suisse’s wealth management
business was a plausible path to resolution, this strikes us as unlikely with First Republic because the wealth
management business is so interwoven with the core banking franchise:
First Republic Has Leveraged Referrals into AUM. At its Investor Day in November, First Republic
highlighted its progress in wealth management. Over the past decade, even as the bank itself has grown
substantially, the contribution of wealth management has risen from 7% to 15% of total revenues. First
Republic employs a high-touch service model, focused on business owners, which leaves the bank especially
well positioned to leverage referrals. Management noted that fully 80% of relationship manager bankers have
made referrals to wealth management that yielded AUM. At year-end 2021, the latest figure disclosed by First
Republic, total AUM referred from the bank stood at $7.8 billion, having increased by 73% over the preceding
two years.
Figure 5: Wealth AUM referred by First Republic bankers is up 73% in two years
FRC Wealth AUM Referred by Bank

($billions)
$9.0
$7.8
$8.0
$7.0 $6.3
$6.0
$5.0 $4.5
$4.0
$3.0
$2.0
$1.0
$0.0
2019 2020 2021
6
Deposit Referrals Also Strong. The referrals have gone in the other direction, too; 69% of wealth
management clients have deposits with the bank. Deposits referred by wealth management totaled $11.2
billion as of September 30, up 90% in the preceding two years. Combined with sweeps deposits, wealth
management accounted for 12.5% of total deposits at First Republic (also as of September 30).
Figure 6: Deposits referred by First Republic wealth management are up 90% in two years
FRC Deposits Referred by Wealth Management

($billions)
$12.0 $11.2
$10.0 $9.2
$8.0
$5.9
$6.0
$4.0
$2.0
$0.0
20Q3 21Q3 22Q3
Referrals Also Have Helped to Attract Wealth Management Teams. The ability to leverage referrals also
has aided First Republic in attracting new wealth management teams, which it has been doing with increasing
frequency. In 2020 the bank hired 8 teams away from competitors; in 2021 it added 11 more; in 2022, First
Republic has brought on 13 new teams managing an aggregate $12 billion in client assets. To be sure, money
talks; First Republic was reported to be offering, at least in some cases, 375% of trailing 12-month revenues.
Even in a period of rising offers, that placed the bank at the high end, but with the proven ability to turn referrals
into deposits and AUM, 375% may be more profitable for First Republic than smaller bonuses are for many
non-bank competitors.
7
Signature Bank
New York Community Bank acquires Signature. Last night New York Community Bank announced an
agreement to acquire most assets and deposits of Signature Bank (with the exception of the bank’s roughly
$4 billion in crypto-related deposits). It is a logical transaction from both a geographic and a product
perspective. Figures 7 and 8 below illustrate the overlap in the NYC-area branch networks. It bears noting that
the significant Manhattan presence means that the level of practical overlap may be somewhat overstated;
asking a customer to walk 20 blocks in Manhattan is a more substantial imposition than asking a customer to
drive an extra mile almost anywhere else in the U.S.
Figure 7: SBNY branch and deposit proximity to NYCB branches
Distance Branches Deposits

(Miles) ($Billion)
0.25 3 $5.0
0.5 7 $33.3
1 13 $80.5
3 27 $98.4
Source: FactSet
Figure 8: SBNY and NYCB have significant branch overlap in the New York City area
Source: FactSet
8
SVB Financial
SVB may be sold as a whole or in pieces. Media reports variously suggest that SVB may be sold to First
Citizens (the North Carolina bank that acquired CIT). or split up with the private bank – essentially the legacy
Boston Private franchise – sold separately.
An unusually simple story. In contrast with the failures of 2008, at SVB there were no esoteric derivatives
or baroque legal structures; it is a dispiritingly simple story. Management failed to manage interest rate risk
with even minimal competence, and regulators failed to use their more-than-ample authority to do anything
about it. Deploying the surge in deposits in short term instruments would have been the low risk, low return
option; chasing yield in long-dated MBS was still perfectly justifiable, if only they had kept it hedged in case
they turned out to be wrong about interest rates. Leaving a portfolio so funded unhedged is simply shocking,
as is the bovine passivity of regulators in the face of such recklessness.
What else might the post-mortem reveal? While the fatal problem is now known, it will be interesting to see
whether any other problems come to light. Anecdotal reports suggest that certain KYM/AML regulations may
have been honored mainly in the breach. In retrospect is may seem remarkable that the bank took so long to
blow up. Time will tell. Either way, we look forward to this disposition of SVB’s assets and deposits, and hope
that the acquirer can fill SVB’s historical role in supporting the tech sector, on a more responsible and
sustainable basis.

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“Liquidity is an illusion… It’s always there

when you don’t need it, and rarely there

The Bank Liquidity Crisis: Day 12

What We’re Watching

Figure 1: Stock performance since SIVB’s mid-quarter update

Company Name Ticker Mkt Cap Price Performance

Figure 3: SVB Financial and Signature Bank Were Outliers

Rank Bank Ticker Total Deposits Market

CHF 900 2,000

AUM (billions) Relationship Managers

Source: Company filings

FRC Wealth AUM Referred by Bank

Source: Company filings

FRC Deposits Referred by Wealth Management

Source: Company filings

Figure 7: SBNY branch and deposit proximity to NYCB branches

Distance Branches Deposits

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