Banks catering to specific niches were a disaster waiting to happen—and regulators haven’t kept up with how tech is moving money

Are regulators equipped to stop bank runs before they happen?

That’s the big question coming to play as the world has watched start-up-focused Silicon Valley Bank’s fall causing a ripple effect for other regional banks. The collapse of crypto-focused Signature Bank followed. Regulators had to step in to close the banks. Both banks were greatly exposed to rising interest rates and credit risk and had mostly uninsured customer deposits. And some banks are getting crushed right now, like First Republic Bank, whose shares plummeted 75% on Monday after declining 35% last week. 

To avoid such meltdowns, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed after the 2008 financial crisis to prevent excessive risk-taking by banks. But after Dodd-Frank went into effect, bank executives, including SVB’s own CEO Greg Becker, argued that stricter regulations were excessively costly for them, Fortune reported. In 2018, a bill was passed that raised the threshold to $250 billion in assets from $50 billion in assets for when companies qualify as a “systemically important financial institution.” That means the bank would be subject to annual stress testing and other regulatory requirements.

Was this one of the root causes of SVB’s fall?

“I don’t really think that the loosening or the relaxation of Dodd-Frank plays into this SVB issue,” Jeff Schmid, president and CEO of the Southwestern Graduate School of Banking Foundation, headquartered at SMU’s Cox School of Business, tells me. “The nature of deposits and client behaviors have changed dramatically in the last, I’d say 10 to 20 years. One change is the technology of moving money if you’re a private citizen, and the second is what they call treasury management inside banking.”

“The time it took for a check to clear from one bank to another is really how you used to be able to move money,” says Schmid who began his career as a bank examiner at Federal Deposit Insurance Corporation in the 1980s. “Now you can basically move it online, or on phone, or just a phone call to the bank. This is where the regulators have missed the boat—they really should have known that they needed to monitor a bank, like SVB, whose deposit base is well over 90% uninsured deposits on a much more real-time basis. The regulators aren’t recognizing where the run risk is. And the bank did a really poor job at risk managing their uninsured deposits.”

SVB didn’t diversify its lending and deposit customers, says Rohan Williamson, professor of finance at Georgetown University’s McDonough School of Business. When Dodd-Frank safeguards were removed, “It was under the assumption that SVB didn’t have this concentration with a specific group or type of investor, like venture capitalists and tech firms, and even those that are in crypto,” Williamson explains. “They just looked at the size level and said, ‘A $200 billion bank, it’s just not that big. And not big enough to cripple the economy.’”

“These types of banks and this lack of diversification are sort of new, within the past decade or so, after the financial crisis,” he explains. “So, that discussion wasn’t there that explicitly said, ‘If we have a group of banks that gets deposits or they make loans to the same businesses, like health care, then that’s a risk. If something happens in health care, then they all go down.’ And that’s what happened in the case of SVB.”

Four years ago Martin J. Gruenberg, a board member at the FDIC, tried to give a warning that uninsured regional bank deposits were risky during a speech in October 2019 at the Brookings Institution’s Center on Regulation and Markets in Washington, D.C, Fortune’s Will Daniel reports. 

“It frustrates me,” Schmid tells me. “The Federal Reserve and the FDIC should by now have many tools (especially for banks that are systemically important, which really is the top 50 banks) and change the nature of how they supervise around technology and around this whole issue of treasury where money can just be very fluid, very quickly.” In comparison, “The big banks, the top 10 or 15, have regulators in their banks all year,” he says. 

Any advice for CFOs during these times? “Talk to your bank about ways to hedge any risk that they might have in their deposit portfolio,” Schmid says. And, “Even if you don’t have the policy in SVB, look at the bank you’re dealing with now,” Williamson says. “If the borrowers are concentrated in one industry, then that should make you a little bit nervous.”

Sheryl Estrada
sheryl.estrada@fortune.com

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Big deal

A new analysis by S&P Global Market Intelligence found the aggregate loan-to-deposit ratio at U.S. banks climbed for the third-consecutive quarter. This is due to persistent loan growth and deposit outflows, according to the report. Data compiled on March 2 shows the industry aggregate was 63.6% in the 2022 fourth quarter, up from 62% in the third quarter, and 57.1% in the fourth quarter of 2021. The ratio was below the pre-pandemic ratio of 72.4% in the fourth quarter of 2019. U.S. banks’ total loans and leases ticked up 8.7% year over year to $12.227 trillion in the fourth quarter of 2022. Loans increased only 1.9% sequentially as U.S. banks significantly tightened underwriting standards. It will be interesting to see what the analysis of Q1 2023 will bring.

Going deeper

The Institute of Internal Auditors’ 2023 North American Pulse of Internal Audit Survey found that technology was a primary driver of risk, with cybersecurity cited by 78% of respondents as being a high or very high risk to their organization, followed by IT (57%), and third-party relationships (51%), which often include IT. These risks were largely consistent across privately held and publicly traded companies, financial and public sectors, as well as not-for-profit organizations, the survey of more than 550 internal audit leaders found. 

Leaderboard

Greg Fisher was promoted to CFO at Alamos Gold Inc. (NYSE: AGI), effective May 1. Fisher will succeed Jamie Porter who will be leaving Alamos to pursue another opportunity in the mining industry. Porter will continue in his current capacity and help support the transition until April 28. Fisher has more than 20 years of progressive experience in the mining sector, including 13 years at Alamos Gold. He joined Alamos in 2010 and was appointed VP of finance in 2011 and SVP of finance in 2021. Before joining Alamos in 2010, Fisher was a senior manager at KPMG, serving mining clients in the firm’s audit practice.

Saloni Varma was named CFO at Thorne HealthTech, Inc. (Nasdaq: THRN). Varma brings more than 20 years of experience across a range of consumer goods companies, most recently as CFO of MotifFoodWorks. She was also the former CFO of ByHeart and has held various leadership roles at companies including Chobani, Dove, and Talenti. Varma has worked in investment banking in New York and Tokyo at UBS, and she began her career in accounting at KPMG.

Overheard

“It would have to be a lot softer to take the hike out. By stopping here, it exposes them to risk of inflation expectations reaccelerating. If they do that, they are risking having to make bigger moves later when they don’t know what the environment will look like. It makes sense to stay the course and keep everything in check. They do have more work to do.”

—Tom Simons, money market economist at Jefferies, told CNBC that he expects the Federal Reserve to stick with a quarter-point rate hike in March.

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