CRE Owners Worried About SVB, Signature Get Immediate Relief But New Concerns Too

The recent bank closures — Silicon Valley Bank getting the most attention, but also Signature Bank — initially raise questions of whether companies would have access to their funds and, among other things, the ability to pay their CRE rents.

Secretary of the Treasury Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chairman Martin Gruenberg made clear in a joint statement that deposits would be available starting Monday, March 13.

“[SVB depositors] will have access to all of their money starting Monday, March 13,” the statement said. “We are also announcing a similar systemic risk exception for Signature Bank, New York, New York, which was closed today by its state chartering authority. All depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer.” Shareholders and “certain unsecured debtholders” won’t be protected.

The Biden administration and federal regulators are stressing that all should be well and banks able to be trusted. “Finally, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors,” the statement said.

In other words, CRE owners and operators expecting rent payments from companies that had their funds in the banks should be able to collect them. Another complication: both SVB and Signature held significant amounts of CRE loans. At the end of 2022, Signature had by far the larger portfolio at $35.7 billion, according its 2022 annual report, including multifamily; commercial property; acquisition, development, and construction; and home equity lines of credit. SVB had a much lower amount, but still showed almost $2.6 billion in its loan portfolio, as its annual report showed.

However, ensuring access to deposits is an issue of rescue, not one of prudent operation and the entire situation leaves many questions.

The 2-year Treasury saw its largest one-day yield drop since 1987, as the Financial Times reported, “as fund managers ramped up bets that the US Federal Reserve would leave interest rates unchanged at its next scheduled monetary policy meeting this month to steady the global financial system.”

At what point can banks be trusted/? Banks listed as systemically important regularly calculate the value of their so-called high quality liquid assets, or HQLA, according to bank and capital markets risk consultant and trainer Mayra Rodríguez Valladares. HQLA levels compared to liabilities — which include deposits, because the customers own those — and total net cash flows can indicate whether a bank has the liquidity to meet its immediate responsibilities. The systemically important banks “have to calculate the LCR every single day,” Rodríguez Valladares tells GlobeSt.com.

But in 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act made changes to the Dodd-Frank regulations that came out of the global financial crisis. Lobbyists and many banks, including SVB, pushed to have banks under $250 billion in assets no longer considered systemically important, meaning there were a number of regulations that no longer applied, like regular liquidity testing and reporting. “When you don’t require banks to calculate and report those numbers to the regulators, if not the public, you can’t do anything about this,” Rodríguez Valladares says.

By the end of 2022, while SVB was the 16th largest US bank based on assets, according to the Federal Reserve’s rankings, the amount was $209 billion, or under the new limit.

SVB had undertaken risky practices, like depending on long-term securities — mortgage-backed bonds and 10-year Treasurys, and roughly 40% of its assets wrote Barron’s. Those wouldn’t count as cash equivalents under GAAP accounting, according to Francine McKenna, a global accounting lecturer at the Wharton School, because they weren’t near the end of their term and their market value was not what was originally booked, given the ongoing rise in interest rates that move inversely to a bond’s price.

“They played roulette,” McKenna tells GlobeSt.com. “No hedging, no nothing, because they wanted every bit of profits.” There was also the heavy concentration in startups and early-stage technology companies, as well as extensive business with the venture capital community. “The VCs were telling [startups] that if you want our money, you need to put your money here [in SVB]” because those investment firms got perks like access to deals.

Signature Bank, with $110.4 billion in assets at the end of 2022, was also forced into closure. “Also similar to SVB, roughly 90% of Signature’s deposits were uninsured meaning balances held by individuals or businesses were above the $250,000 insurance limit guaranteed by the FDIC,” Barron’s wrote. Also, Signature was closely tied to the crypto industry, which has seen shaky times, and that may have worried depositors.

Without a change in the law, regulators can’t ask these “smaller” yet large banks to provide the reports that help indicate problems in advance.