In this week's issue of Jumbo Rate News we take a look back at some of the major events that impacted the banking industry in 2023 - from the failures of some rather large banks early on in the year, to the fires that shut down much of the island of Maui.
We also dive into how the Federal Reserve's mission to lower inflation served to ignite the Jumbo CD market.
We list the 50 banks that reported the strongest Jumbo CD growth in the first three quarters of 2023 on page 5; each exhibited more than 360% growth in their Jumbo CD liabilities.
2023: Another Crazy Year for the Books
Beware the ides of March, indeed. If you’re in banking, the biggest news of 2023 was the return of the bank run in March. The modern bank run, as we discovered, can be accomplished with just the touch of a few buttons. Deposits can now flee at almost the speed of light, and they did. It started with Silvergate.
Two years ago, Zero-Star Silvergate Bank, CA, ended 2021 with over $16 billion in assets and over $14 billion in deposits. Its customers were largely crypto firms. By the end of 2022, Silvergate’s assets were down to $11.3 billion and its deposits were just $6.3 billion.
The deposit exodus had already begun, but on March 1, 2023, when Silvergate made public that it had doubts regarding its ability to remain in business, remaining deposits flew. Silvergate did not go down as a failure, though. Regulators allowed it to wind itself down and it is still in the process.
However, Silicon Valley Bank (SVB), did fail, just ten days later. Where Silvergate Bank relied too heavily on one, very volatile, industry, SVB had quite a heavy reliance on another—venture capitalism. SVB was also ill-prepared for the Fed’s aggressive interest rate hikes. On March 8th, SVB announced it would take a large hit on some underwater bonds and customers panicked. In just two days, the bank failed.
In two more days, another deposit run on another “crypto-esque” bank, this time in New York, Signature Bank, caused it to fail. It was a rough few weeks for the banking industry. After 28 consecutive months without a single bank failure, we now had two large ones in a matter of days. The industry and the nation were gripped in fear.
When news spread that First Republic Bank was starting to falter, 11 of the largest U.S. banks pledged to stand behind it. They infused the bank with $30 billion in deposits to keep it afloat. For a minute, it looked like it might work. It did not.
First Republic Bank lost $7 billion in deposits in the first quarter alone. Its stock price fell overnight from $115 per share down to below $20. First Republic stock trading was even halted to mitigate the damage; but it succumbed on May 1st.
Two other small banks would not see the end of 2023 either. Failures were arguably the biggest industry news in 2023, but there was more. A year and a half after the Biden administration called for more scrutiny on large and regional bank mergers, U.S. Bancorp finally gained approval and completed its acquisition of MUFG Union Bank.
In spite of the fact that these two banks were direct competitors in 25 markets (in AZ, CA, OR and WA), and in spite of the added scrutiny, the two big banks were officially combined in May. In the first three quarters of 2023, we lost a total of 86 banks to merger.
In Hawaii, bankers are still unable to estimate the economic damage inflicted by the August wildfires. Five of the seven banks head-quartered in the Aloha state have (or had) branches in Lahaina on Maui. Cleanup efforts are ongoing, but here is a branch update:
The branch of 4-Star American SB located at 154 Papalaua Street in Lahaina remains closed. The bank is committed to assisting its customers in that area and will provide ongoing updates on relief efforts and resources on its website and in social media.
In fact, all banks and credit unions in the state are available and eager to help those in need. Although, and for obvious reasons, an appointment is most likely required.
The Kahana Branch of 3½-Star Bank of Hawaii is open for business as is the Lahaina branch of 5-Star Central Pacific Bank. However, the Lahaina branches of 4-Star First Hawaiian Bank and 4-Star Territorial Savings Bank are closed indefinitely.
And of course, we must mention the Federal Reserve and its fight against inflation. What began in March 2022 as a modest 25 basis point increase in the Fed Funds rate continued well into 2023. After eleven increases, the overnight rate was brought from near zero to between 5.25% and 5.50%. Other rates—both borrowing and deposit—rose along with it. Banks that had become too comfortable with our extended (2 year) period of near-zero interest rates found themselves in a very vulnerable position.
While a decision was made to make all depositors whole in the big failures of 2023, their sudden demise served as a wake-up call as many uninsured deposits found their way to the safety of federal deposit insurance.
That, combined with higher CD rates, resulted in a flurry of new Jumbo CDs. In fact, during the 12 month period from September 30, 2022 to September 30, 2023, while total deposits at U.S. banks increased just over 4%, Jumbo CDs at U.S. banks increased by 75% - from $846 billion to $1.481 trillion.
The 50 banks listed on page 5 reported the strongest Jumbo CD growth in the first three quarters of 2023; each exhibited more than 360% growth in their Jumbo CD liabilities. The other side of this sword, of course, is that borrowing rates also rose. As we maneuver through 2024, we will have a close eye on various types of bank credit—both personal and commercial—to see how they are coping.
