Speaker 1: Citigroup was the poster child for what could go wrong in a financial

Speaker 2: crisis. The company collapsed from the height of over $500 in 2006. The collapse of Silicon Valley Bank, Signature Bank and Credit Suisse were a harsh reminder of how quickly a trusted institution could fail.

Speaker 3: There's no doubt in my mind there's going to be more bank failures.

Speaker 4: Now the distress is really moving to the community bank category, and those are between one and 10 billion in assets.

Speaker 3: The policy priorities are not as urgent when we're talking about smaller institutions. And then this reinforces this whole too big to fail idea.

Speaker 2: Citigroup is in trouble. After the company's collapse during the 2008 recession, Citi stock has continuously struggled. Shares of the company saw more than a 30 percent drop over the last five

Speaker 5: years. The firm has faced many ups and downs over the course of my career and it's clear we have challenges that we need to urgently address right

Speaker 1: now. Citigroup has had worst in class efficiency, returns and stock market valuation, and that's led to underperformance over almost any

Speaker 6: time frame. They haven't been profitable enough. It's a chronic laggard in profitability. It's not that it's teetering on the edge.

Speaker 2: Once the largest bank in America, Citigroup is now the third biggest in the U.S., with over $1.7 trillion in consolidated assets. Globally, it is the 11th largest, with just over $2.4 trillion in total

Speaker 1: assets. Citigroup, I believe, is finally turning a page. The first step to improve is to recognize that you have a problem in the

Speaker 7: first place. We know there is a clear-cut case for change at Citi. I hope you've seen we're acting on it, positioning our firm's long-term future and tackling the issues that have held us back head-on.

Speaker 1: The challenge now will be executing and changing that culture to what you want, to be more real-time and more aware, more intense and more about

Speaker 2: winning. So what kind of changes is Citi making and can it return to its former glory? In April 2021, Jane Fraser, the CEO of Citigroup, announced a bold shift in the company's strategy, exiting 13 retail markets outside of the United States. Asia and the EMEA region accounted for more than a third of Citi's net revenue in the year prior.

Speaker 6: This global vision that Citi retail banking was an aspirational bank, that it was kind of like the Nike swoosh or the Mercedes car, that it was a branded global good. And every CEO had that vision. And, you know, maybe in the 60s it was true.

Speaker 1: Under Jane Fraser, Citi is finally unwinding the failed 50-year experiment of serving consumers all around the world. The old banking adage has played out. Wholesale banking is global, retail banking is local.

Speaker 2: In 2022 alone, Citigroup completed sales of its business in five countries and added Mexico to the list of countries it's departed.

Speaker 4: What's been obvious to analysts for a long time is that Citi hadn't become too unwieldy, too big to manage, and that ultimately a lot of the disparate parts overseas, they didn't really have very many synergies between them. Former executives I spoke to actually referred to these businesses as melting ice cubes. In other words, that over time, with disinvestment, with perhaps not the greatest management focus from HQ, that ultimately their value was decreasing versus some of the sharper, more motivated, locally owned competitors in many of these overseas markets.

Speaker 2: Citi instead announced its plans to divert its resources and focus to double down on wealth management. It's a tactical move that several other major banks have adopted in recent years.

Speaker 6: I always like to say banking is all about money. And guess who's got money? Rich people got money. Everybody wants to bank affluent people.

Speaker 4: You have a financial advisor usually getting paid on an annual basis of one to two percent of the assets under management. And to that very basic model, you could add fees for margin loans or jumbo mortgages and things like that. But the reason why Wall Street investors tend to love this business is that it gives off an annuity like stream of earnings. No matter what's going on in the merger markets, what's going on in trading.

Speaker 1: It offers high returns. It creates growth opportunities in areas that are in the early stages of wealth generation, like Asia and the Middle East. And it comes with less risk of big mishaps. So the regulatory treatment is better.

Speaker 2: But at its core, Citi's new strategy is all about simplifying down their

Speaker 6: business. Part of the idea is that if you shrink down the footprint and you're not doing so many things in so many different jurisdictions, that not only will you have better critical mass in the markets that you do choose to serve, you'll also get less capital requirements because you're less complex, you're simpler.

Speaker 1: When Citi's finally done in creating a more simpler firm, interestingly, they're going to look more like Citigroup before the merger from 25

Speaker 2: years ago. Citigroup's history begins in 1812 with the creation of the first national Citibank. The bank grew rapidly after a series of mergers and acquisitions until it was renamed Citibank in 1976.

Speaker 4: The next 10 or 15 years, it becomes the biggest credit card issuer in the country. They expand to 90 different markets around the world. And all along, you know, innovating, you know, they were the first checking account. They were the first bank to offer compound interest on

Speaker 2: savings. But it was the merger between Citicorp, the holding company for Citibank, and a financial services company, Travelers Group, that created the Citigroup we know today.

Speaker 4: Their idea was to take the biggest bank in the United States, the biggest insurance company and wealth management force in the United States, and merge them into a financial supermarket. So all of your financial needs under one roof.

Speaker 2: Citibank was once the biggest bank domestically, with assets worth over $2.1 trillion in 2007. By comparison, J.P. Morgan had assets worth over $1.5 trillion. And Bank of America's was just over $1.7 trillion. But the company's dominance came to a devastating end in 2008. Shares of the company collapsed from the height of over $500 in 2006 to at one point just under a dollar in 2009.

Speaker 1: Citigroup was the poster child for what could go wrong in a financial

Speaker 4: crisis. Leading up to the financial crisis, Citigroup was fairly aggressive in loading up on subprime mortgages and other risky assets that soon became

Speaker 2: toxic. Citi eventually joined the list of institutions deemed too big to fail, receiving $476.2 billion dollars in bailout from the federal government. But despite surviving the 2008 financial crisis, Citi hasn't been able to make a full recovery in the market. Citi declined to put forward someone for an interview for this video.

Speaker 4: If you look at a chart of the Citigroup stock, it's basically gone nowhere for the last 10 years.

Speaker 6: They have bounced back in the sense that their credit quality has been stable. They've been consistently profitable. Their problem has been that they haven't been profitable enough.

Speaker 4: Really, one of the key metrics in banking is its price to tangible book value, price to TBV. And in that category, it's really far below all of its peers. It trades at approximately 0.5 times book value, which is below 1. And 1 is really considered the point where below 1, you're really kind of destroying value for shareholders. If you look at J.P. Morgan, it's at close to 2, at 1.8. Morgan Stanley, even better at 2. And so, you know, the old saying among bank analysts is that you're supposed to buy banks when they're about 1 or below and sell them if they're about 2. Well, Citi has been below 1 for the past decade and really the entirety of the post-financial crisis period.

Speaker 2: Today, Citigroup mainly makes its revenue from two sources. The first is Institutional Clients Group, which accounted for 54.7 percent of total revenue in 2022.

Speaker 4: Contains their Wall Street businesses, their trading, their merger advisory business, and also something called Treasury Services that investors actually really love. It's essentially a bank to global corporations, and they're one of the biggest treasury services providers in the world, second only to J.P.

Speaker 2: Morgan. Their second biggest division, Personal Banking and Wealth Management, accounts for 32.1 percent of total revenue. Despite their shift in strategy, Citi's investment in wealth management hasn't paid off yet. In 2022, Citi expected their global wealth management to generate a compound annual revenue growth in the high single digits to low teens. But Citi's wealth management revenue fell 5 percent year over year in the second quarter of 2023.

Speaker 6: The absolute revenues are hard to look at in isolation right now for a couple of reasons. One is investment banking just fell off a cliff and everybody is experiencing weakness there. And then secondly, you had this steady drumbeat of divestitures.

Speaker 2: Citi's wealth division oversaw $746 billion globally in client assets during 2022. In comparison, Bank of America's Merrill Lynch had an asset size totaling $2.8 trillion in the same year.

Speaker 6: The unfortunate thing for Citi is that they had a very good wealth management business in the form of Smith Barney. But during the financial crisis, they had to sell that off and they sold it off to Morgan Stanley, which is now one of the premier wealth management franchises. So they need to kind of reestablish and rebuild

Speaker 4: that. So if you look at the history of Citigroup, they're trying to get back into something that they have essentially ceded to their competitors, giving their competitors the juice and the ability to really make way in this business model that is highly favored right now by

Speaker 1: analysts. It just waits to be seen whether Citi will be successful. I'm skeptical. For as much more positive about Citi's strategy, when it comes to their global payments or banking or markets business, I think it's to be determined how this wealth management strategy plays

Speaker 2: out. Citi might be on the right path for success, but the key will lie in whether the company will be able to show sustainable growth.

Speaker 1: The first step to improve is to recognize that there's a problem in the first place. And so Citi has been divesting about a dozen of their consumer operations outside the United States. They're investing in their winners, disinvesting in their losers. They're transforming.

Speaker 6: My view is always that it's not necessarily a high return on equity that makes a stock price go. It's a rising return on equity. And Citi certainly has the potential for that, even though it's taken way, way longer than one could have reasonably expected.

Speaker 8: Hundreds of small and regional banks across the U.S. are feeling stressed. More than 280 banks face the dual threat of commercial real estate loans and potential losses tied to higher interest rates.

Speaker 9: There's no doubt in my mind there's going to be more bank failures. Or at least below their minimum capital requirement.

Speaker 10: There will be bank failures, but this is not the big banks.

Speaker 8: Rapid interest rate hikes can mean borrowers suddenly face more expensive loan payments. And if they can't afford to pay up, they may default on their loans. A record $929 billion worth of loans are coming due, aka maturing, in 2024, driven by mass extensions of loans originally due in 2023. Regulators are working behind the scenes with potentially at-risk

Speaker 4: lenders. They're issuing sort of confidential, under-the-radar reports saying you've got to raise your capital.

Speaker 11: We'll see a lot fewer bank failures than we would otherwise if we're successful in attracting private capital to recapitalize these banks.

Speaker 4: These are banks that probably need to raise capital or they can try to get acquired by a stronger bank.

Speaker 8: However, banking sector acquisitions have dwindled. These stressed banks could have big implications for the U.S.

Speaker 1: economy. One year since the collapse of Silicon Valley Bank.

Speaker 12: Of course, we're seeing cracks form once again a year later.

Speaker 8: Both major and regional bank indexes are still struggling since 2023's bank failures.

Speaker 3: I think most of them are just fine, but confidence is everything in banking. People start losing confidence and even the healthy banks can be adversely impacted.

Speaker 8: Here's why hundreds of small banks may be at risk of failure and how insolvency can be avoided. The U.S. has thousands of banks.

Speaker 11: There are about 4,600 banks in the United States, but in most developed economies in the world, there aren't regional and community banks.

Speaker 8: Approximately 4,000 banks in the U.S. are small banks, also known as community banks. If you add up the collective assets of those 4,000 banks, small banks control roughly the same value of assets as America's largest bank, J.P. Morgan Chase, with $3.2 trillion of assets.

Speaker 4: Now the stress is really moving to the community bank category, and those are between $1 and $10 billion in assets, the great bulk of institutions that are going to be, you know, facing this stress.

Speaker 8: The Claros Group analyzed 4,000 banks, screening regulatory call report filings for banks with over 300 percent of capital in commercial real estate loans and potential losses tied to interest rates.

Speaker 11: So I'm Brian Graham. I'm a founder and partner in the Claros Group. We thought it was important to focus on how they measured up on those two macroeconomic factors that are at work.

Speaker 8: 282 U.S. banks are at risk, with nearly $900 billion in total assets. The majority of those banks are smaller lenders with less than $10 billion in assets each. 16 of those banks are larger, with anywhere from $10 to $100 billion in assets. There's only one bank with over $100 billion in assets.

Speaker 4: You know, one point of this analysis is to say, look, across the universe of 4,000 banks, where are the issues going to be? They are going to be the middle to small size banks, which is by its nature less systemic. I think the issue is that a lot of these smaller banks support communities away from the coast. You're essentially hamstringing the economic development in those

Speaker 3: communities. First of all, even if they're smaller banks, the communities that rely on them certainly care about them.

Speaker 8: The U.S. has about 130 banks that are considered regional banks, and collectively they control just under $3.1 trillion in assets.

Speaker 3: The larger regional banks, they're a really important source of credit for smaller and medium sized businesses, local governments, nonprofits.

Speaker 8: Without regional lenders, more businesses may have to turn to big banks for services that may be more expensive and less personable, and they may not like their options.

Speaker 3: They provide competition for the really large, you know, megabanks, the multi-trillion dollar banks, which is good.

Speaker 8: For individuals, the consequences of small bank failures are more

Speaker 11: indirect. I think we have a very stressed banking system, but the vast majority of those banks aren't insolvent or even close to insolvent. They're just stressed. Doesn't mean that communities and customers don't get hurt by that stress. Natural reactions to not invest in the next branch or technological innovation or to make the next hire, it just hurts the community in a different way. And it hurts it more kind of subtly and gradually and over time than a

Speaker 3: bank failure. Directly, it's no consequence if they're below the insured deposit limits, which are quite high now, $250,000.

Speaker 8: That means if a bank insured by the Federal Deposit Insurance Corporation, also known as the FDIC, goes under, all depositors will be paid up to at least $250,000 per individual, per bank, per ownership

Speaker 3: category. FDIC's really got a strong record on this, so people should not

Speaker 8: worry. The U.S. has the largest commercial property market globally and banks underwrite the majority of commercial real estate loans. If you think about the banking industry overall, there are four basic types of loans, consumer loans, C&I loans, which are essentially loans to companies, residential mortgage loans and commercial real estate loans.

Speaker 9: Regional and smaller banks have always tended to have higher concentrations of commercial real estate.

Speaker 11: It's less that they just made a bad decision and jumped into commercial real estate with both feet, and it's more that they just don't have the scale to compete with the larger banks in the country in consumer lending or in residential mortgage or in commercial industrial lending. And that leaves them with a higher concentration and exposure to commercial real estate.

Speaker 9: The markets in general are poking the banks on their exposures. You know, how are they being managed? What are some of the stresses that they're thinking about? And probably most importantly, how are they reserving for those

Speaker 8: potentials? When the Federal Reserve raises rates, commercial real estate loan payments become more expensive for borrowers. If borrowers can't afford payments, they may default on their loans.

Speaker 4: Federal Reserve Chairman Jerome Powell has candidly said, look, there are going to be bank failures. It's going to happen.

Speaker 10: We have identified the banks that have high commercial real estate concentrations, and we are in dialogue with them around, you know, do you have your arms around this problem? Do you have enough capital? Are you being truthful with yourself and with

Speaker 8: your owners? The Federal Reserve hiked interest rates 11 times since March

Speaker 11: 2022. Interest rates being much higher than they were a couple of years ago. It means the value of fixed rate assets has gone down very significantly, and that's an embedded loss that will show up one way or another over time.

Speaker 4: Therefore, there are a ton of unrealized losses on banks held to maturity portfolio in terms of bonds and also the mortgages that they issued that were all done under a low interest rate regime. And so those are unrealized losses. They're sitting there on the balance sheets.

Speaker 8: This is because bonds issued when interest rates are higher will have higher returns for investors.

Speaker 9: If a bond is paying 3 percent and interest rates are now 6 percent, your 3 percent bond is now worth a lot less.

Speaker 3: What that does do is creates pressure on what's called the net interest margin. So as interest rates go up, banks may need to pay more and more interest on their deposits. They still have a lot of lower yielding loans and securities. So that really narrow the margin. That's the way bank traditional banks make money. They take deposits and pay one rate and lend it at a higher rate. But when rates rise, that dynamic can become inverted.

Speaker 8: When a bank sells assets that have decreased in value, those losses become

Speaker 11: realized. The only thing that makes those losses unrealized is the banks haven't sold them yet. So they're still on their books and they're still hoping that interest rates will go back down to zero and whatever the value loss is will go away.

Speaker 3: Classic interest rate risk management and good banks and good bank executives should know how to manage it.

Speaker 8: And I think most are. The Fed is being cautious about interest rate changes in 2024. However, a rate cut may not change how much stress banks are facing.

Speaker 11: Hope is never a plan. If you're a stressed bank in this market, your choices are pretty simple. You can either hunker down and basically shrink in order to try and match whatever capital it is you do have. I think a lot of institutions are likely to take that path.

Speaker 3: Regulators do allow banks to work with their borrowers and having trouble repaying their loans. They can do a restructuring. They can extend the maturity. They can lower the interest rate. There may be capital consequences for that. But nonetheless, that's usually better than borrower defaulting, which can be very expensive for a bank. Or banks can raise capital.

Speaker 11: The good news is that the solution to this crisis can and should be a private sector solution, not a whole bunch of government bailouts, because the problem isn't a bunch of insolvent banks. The problem is a bunch of stressed and undercapitalized banks. What's the purpose of the capital markets if not to provide capital?

Speaker 8: Take New York Community Bank as an example.

Speaker 5: The New York Community Bank did not fail. New York Community Bank Corp, because the shares, they are rising after the bank raised more than a billion dollars from a group of investors.

Speaker 11: They pumped capital into that institution and hopefully positioned it to be successful and to serve its communities better than they would have if they were still in hunker down mode.

Speaker 13: Putting a billion dollars of capital into the balance sheet, it really strengthens the franchise and whatever issues there are in the loans will be able to work through.

Speaker 8: Or stronger banks can acquire the weaker banks.

Speaker 4: Now, the issue there that we know is that last year was actually a 40 year low in terms of bank M&A. It was the lowest since 1990, even before an inflation adjusted basis.

Speaker 8: There were fewer than 100 bank acquisitions in 2023. The total value of acquisition deals made was the lowest since 1990 at $4.6 billion.

Speaker 9: We don't expect to see a lot of M&A activity for the foreseeable future. I think the merger map probably doesn't really work for most banks right now in terms of lower equity valuation. So it's hard to get a buyer and seller to agree on price right now. More importantly, what we're also seeing is a regulatory pushback on M&A.

Speaker 8: Some regulatory institutions are considering stricter scrutiny over merger and acquisition deals.

Speaker 3: The Justice Department has made public statements about this.

Speaker 9: The OCC put out a proposal which would raise the bar for bank M&A, particularly if you kind of cross over that the $50 billion mark.

Speaker 3: The FDIC put out a draft statement of policy on M&A. FDIC guidance suggested there'd be really a lot of scrutiny of anything over $100 billion.

Speaker 8: Deals of all sizes are facing scrutiny. For example, regulators recently refused approval of Toronto Dominion Bank's $13.4 billion deal to acquire First Horizon Bank.

Speaker 3: We have a problem of concentration in the banking industry, but it's not at the regional bank level. We're not worried about concentration at the mega bank level.

Speaker 11: I think there's some really legitimate points that the regulators are raising about making sure that any mergers amongst the largest banks in the country are subject to some pretty strict scrutiny. Makes sense to me. I don't think that's true for those smaller banks that are struggling for survival, just don't raise the same macroeconomic, antitrust, systemic stability.

Speaker 3: You have a little concern on the regulatory responses, whether they intended this way or not, I don't know, but are being interpreted, and I think somewhat logically so, being interpreted as discouraging M&A. I think clarifying that M&A with a healthy bank that would result in a stable, unified structure, I think making clear that those are welcome and encouraged, I think that would be good. I don't know if they're going to do that. They seem to be going the opposite way, but you want to be encouraging it now. That's what I would like to see.

Speaker 8: Regulators say they are working with bank leadership to address concerns.

Speaker 10: I think it's manageable, is the word I would use, but it's, you know, it's a very active thing for us and the other regulators, and it will be for

Speaker 4: some time. You have regulators who are very aware of the situation. They're now on top of it, and they're issuing matters requiring board attention to these institutions, and they hope to be able to cajole them into raising capital, to selling some assets to improve their capital situation, and to do so in a way that doesn't cause anything systemic.

Speaker 8: Even if a stress bank raises capital or hunkers down, researchers expect some failures on the horizon.

Speaker 11: These are real economic losses and challenges, and we'll see some, but I don't think we'll see a massive wave of bank failures. We'll see a lot fewer bank failures than we would otherwise if we're successful in attracting private capital to recapitalize these banks and for at least the smaller banks permitting some emanating consolidation, which would in turn attract more private capital. That certainly would serve to reduce the number of any bank failures we'll

Speaker 8: have. Consider the timeline of the great financial crisis and its

Speaker 9: fallout. It took about two years from 2008, so you didn't really see the peak losses and delinquencies till about 2010. And we think the same thing will be true this time as well, which is this is probably going to play out over the next probably two years. So we'll probably still be talking about this in 2025 and maybe even into

Speaker 8: 2026. There are key differences between the bank failures of the great financial crisis in the current macroeconomic environment.

Speaker 11: The global financial crisis was characterized by a lot of bank failures. And so we kind of are conditioned to expect stress in the banking system will be defined by a bunch of bank failures.

Speaker 3: But during the great financial crisis, boy, when it was those big banks, when they were in trouble, we didn't have any trouble going to the hill and raising raising hex. At the end of the day, that's who bank regulators need to be thinking about, the people who use the banks. I think that kind of shows that the policy priorities are not as urgent when we're talking about smaller institutions. And then this reinforces this whole too big to fail idea.

Speaker 11: Most of these banks aren't insolvent or even close to insolvent. So I think we actually have too few bank failures. The fact that our banking system is different from that of most other economies gives us the flexibility to allow those banks to innovate and to experiment and to try new things, some of which may not be successful. And we can't do that with, you know, the biggest banks in the country. They're just too large and too interconnected. And the economy is too dependent on their continued functioning. So we can't afford really, really big bank failures. But, you know, the economy is going to be just fine if a billion dollar bank fails.

Speaker 2: More than $23 trillion are held by banks in the United States, with 94 percent of adults owning some form of bank account.

Speaker 14: Banks are critical to the American economy. Credit is the lifeblood of the economy. Banks are like the heart of our economy that pump credit, the blood throughout the financial system.

Speaker 15: They bring lenders together with corporate individuals who need financing. The deposits that they hold for institutional and retail clients, they help fund the economy, help make the economy grow.

Speaker 2: But like any other institutions, banks are capable of failing. Over 550 banks have collapsed since 2001, according to the FDIC.

Speaker 14: The first year in American history where not a single bank failed was 2005. Before 2005, at least one bank had failed in every year. In American history, it's cyclical.

Speaker 15: We have periods of time where the economy is doing well, things are stable, and we have years where there are no failures at all. And then we have other episodes where we go through recession or some kind of financial stress and failure spike.

Speaker 2: The collapse of Silicon Valley Bank, Signature Bank and Credit Suisse were a harsh reminder of how quickly a trusted institution could fail, putting billions of dollars at risk.

Speaker 16: It's the largest bank meltdown since the Great Recession more than a

Speaker 2: decade ago. So what exactly causes a bank to fail and what implications does it have on the U.S. economy? There are three main risk factors that can push banks into the risk of

Speaker 15: collapse. You have credit risk where they make loans, institutions and the individuals they're making loans to, they're exposed to default on those loans. So banks carry credit risk. Secondly, they have interest rate risk. They have assets that have a particular interest rate risk profile. They have liabilities. And one of the jobs of the bank is to match that the interest rate profile of assets and liabilities and to try to minimize that interest rate risk. And they have liquidity risk as well.

Speaker 2: Bank failures become a possibility when these risk factors impact either the bank's liquidity or solvency. Solvency refers to a bank's ability to meet its long-term financial obligations and debt, meaning the bank's total asset is capable of covering its liabilities.

Speaker 12: In terms of solvency, this is generally when banks have a lot of loans go bad. The way the banks make money is that they bring deposits in and then they lend that money out on the premise that they're going to collect those loans back and they collect those loans back with a little bit of interest. They pay some of that interest to the depositors and they keep the rest. Well, if banks have loans that go bad, that's money that's not coming back into the bank. And if you have enough of those go bad, it can cause the bank to fail, where there's not enough money coming in to pay those depositors that they've gotten the money from.

Speaker 2: Many of the banks failed due to insolvency during the 2008 recession, including Washington Mutual, the largest bank to collapse in American

Speaker 12: history. If you recall back in the aughts, a lot of people were getting adjustable rate mortgages and they were getting mortgages that were often referred to as ninja loans or ninja mortgages, which was no income, no job, no assets. They would get people into a mortgage with a very low teaser rate, maybe half the rate of what you would actually pay. But after six months or a year or two years, then the rate would adjust to market rates. Well, if you're barely able to afford that mortgage at the teaser rate, that introductory rate they gave you, once those rates jump, people couldn't afford those mortgages anymore and they began to default on those mortgages. And so Washington Mutual had a lot of these. And so you saw this with a lot of banks in that 2008, 2009, 2010

Speaker 2: timeframe. Liquidity refers to how much money banks have to meet their short term financial obligations.

Speaker 14: When you put your money in the bank, you're entitled to that money whenever you want. That's the promise that's been made. The bank takes that money and lends. It lends to people for mortgages for 30 years, for cars, for five or seven years, for all these loans that are a long time. So they have a mismatch of their timing between what they owe you and your deposits immediately and what they own, which are these assets that are long term. Liquidity is when a bank has a crunch. Generally, depositors want their money immediately and the bank has more demands for that immediate money than they have assets that they can liquidate in order to get people their money. So they fail due to a crisis of liquidity.

Speaker 2: It was ultimately liquidity that caused SVB to become the second largest bank to fail in American history.

Speaker 14: Do you remember when you could get a mortgage at 3 or 4 percent? That mortgage got put into a big pool and SVB was one of the buyers of that. Now, when interest rates rose sharply, those cheap mortgages were worth less. When people are afraid that a bank doesn't have as much capital, that its assets aren't there, they become jittery and they want their money and they try to make a deposit run. So a handful of businesses wanted their money. SVB had a liquidity problem. That was immediately why it failed. There was a run on the bank. No bank can withstand everybody asking for its money back at the same time. Right.

Speaker 2: And that happened. Once a bank fails, the Federal Deposit Insurance Corporation steps in. First established in 1933, the organization was created in order to protect depositors and improve trust in the American banking system.

Speaker 15: The FDIC, this is their kind of bread and butter. They know how to unwind a bank in kind of the least harmful way.

Speaker 2: For most banks, FDIC attempts to sell the failed bank in whole or in part to another bank in healthy standing.

Speaker 12: Another bank comes in and will take over all of the loans or most of the loans of the bank and their deposits. And if there's a mismatch between the loans and investments that they're getting and the deposits that they're getting, then the FDIC may have to put some money into the pot to make it attractive for another bank to take

Speaker 2: that over. In other cases, FDIC takes a more involved approach.

Speaker 12: In the case of Silicon Valley Bank, what they did is take possession of the bank and then basically create what they call a bridge bank. And the idea of this bridge bank is to get the depositors their money and then collect on any loans that they might have. In essence, what they're going to do is liquidate this bank so that the bank no longer exists.

Speaker 2: Regardless, depositors in an FDIC insured banks are covered up to $250,000 per depositor per bank for each account ownership category. Insurance also plays an important role in preventing panic among

Speaker 17: depositors. The whole purpose of deposit insurance, which is what the FDIC was created to do, is to say, OK, the reason why you're trying to pull out your money is because you think if you wait too long and this bank fails, your money won't be there. So what if we back your money and we say even in the case of this bank was to fail, we will insure you up to a certain point.

Speaker 2: However, not all banks are FDIC insured. Yet the federal government made a controversial move in 2023 when they announced that all depositors of SVB, including more than 95 percent who are uninsured, would continue to have access to their money.

Speaker 14: I am very concerned that we're setting a precedent towards unlimited government support for every dollar in the banking system.

Speaker 15: There's now an expectation in a similar event they would do the same thing. And if that's the case, it really needs to be addressed in a much more comprehensive way that would presumably involve raising the deposit insurance limits and having the deposit insurance premiums reflect that

Speaker 2: accordingly. Nonetheless, a swift action from the government is vital to containing bank failures that could lead to a domino effect.

Speaker 18: How much could this spread? From lessons learned in the past from banking regulators and financial crises, the quicker you move to ring fence or isolate this incident from other banks, the less likely there is of a contagion effect. Andrea, that's probably the reason why you saw the FDIC and California regulators act as quickly as they did with SVB.

Speaker 19: There's definitely the potential for dominoes and the dominoes are, well, if we don't know if this bank solvent, what's the next?

Speaker 15: Sometimes it's an oil crisis or a farm crisis, housing market and the great financial crisis. These are all things that that large numbers of banks have

Speaker 12: exposed to. You have banks that are doing the same things that at one point might have seemed safe, but at the extremes are not safe. And then something triggers it so that those dominoes start to fall.

Speaker 2: Bank failures can have a major impact on the American economy.

Speaker 12: All we have to do is go back to the financial crisis of 2008, the failure of those financial institutions. It greatly restricted and constricted the economy.

Speaker 15: Banks have to conserve their capital. They do that by tightening their lending standards. As they tighten their lending standards, there's less credit flowing through the economy. And that contraction of credit is a negative impulse to economic growth. It can trigger either economic slowdowns or more seriously could lead us into economic recessions.

Speaker 2: So are there enough regulations to prevent and buffer against bank failures? Experts say that's the wrong question to ask.

Speaker 14: People are asking the question, do we get the rules right? Well, there's a more elementary question. Did we enforce the rules right? And the answer is no.

Speaker 12: If you look at what the regulators were doing with SVB as recently as 2019 and more recently even, they were warning that things need to be changed here, that they're taking on additional interest rate risks, that they're going to have some potential liquidity problems in the event that interest rates begin to rise.

Speaker 14: There were failures of supervision done by the Federal Reserve, obvious and rampant throughout Silicon Valley Bank and potentially others.

Speaker 2: The collapse of SVB also revealed the danger of deregulation. Several politicians and researchers have openly blamed the rollback of Dodd-Frank regulations as one of the main reasons for its failure.

Speaker 17: We start doing what's known as stress tests where the Federal Reserve, you know, create these hypothetical situations of like our economy in distress in various ways and then like, you know, use these simulations for the bank and let's based on how the bank is right now, how will you survive, you know, a period of stress, right? So we start doing all these things and it's great. And then literally on the 10th year anniversary of Dodd-Frank passing 2018, we see in under the Trump administration, there is now this call to deregulate a bit, right?

Speaker 20: What we're doing today with respect to Dodd-Frank is truly important legislation. And I have to say for a Congress that they say, you know, won't be doing much because we have an election coming up. I think we're doing an awful lot when you think about it.

Speaker 12: They raised the limit up to $250 billion that were subject to some additional scrutiny from $50 billion. And so SVB happened to fall in that category of between $50 billion and $250. So when they raised that to $250, they weren't subject to this greater

Speaker 17: scrutiny. Deregulation is not the answer, right? We keep trying that and we keep failing. So at some point, like we need to stop this game that we're playing with

Speaker 2: ourselves. Panic is never the right reaction following a bank's collapse. Nonetheless, there are always lessons to be learned from it.

Speaker 12: All in all, the U.S. banking system is safe and sound. For individuals, though, it doesn't hurt to take a look at the financial health of your financial institution, your bank, if you happen to have more than the insured amount. And unless you're having to make payroll, you know, if it's your savings that we're talking about, then it might make sense for you to spread that money out just for your peace of mind. Because if you are banking with a small community bank and something were to happen to that bank, it's unlikely. But if something were, it's unlikely that the that the regulators are going to come in and guarantee all of your deposits. They would only be guaranteeing up to that $250,000.