The Banking Crisis: New Reporting MBAs Need to Know

Surprising new facts about the banking crisis are suddenly emerging, contradicting hundreds of stories published by mainstream media outlets since Silicon Valley Bank collapsed. Because these facts and data dispute narratives reported by many of those legacy outlets, opinion leaders within the business community—such as MBA students and alumni—will find these new disclosures of essential interest.

In our recent article about Silicon Valley Bank, we reported on new research by four business school professors whose analysis demonstrates the effects of the Federal Reserve’s rapid interest rate hikes; they show how these actions degraded America’s traditionally robust banking network into a fragile system at risk for repeated bank failures. Written by Dr. Erica Xuewei Jiang of the University of Southern California, Dr. Gregor Matvos of Northwestern University, Dr. Tomasz Piskorski of the Columbia Business School, and Stanford University’s Dr. Amit Seru, that research was widely quoted in the press and also served as the foundation of a New York Times op-ed by Dr. Seru.

Like most other publications, here at BSchools we focused on the headline-grabbing main point of these scholars’ research. That was the team’s conclusion that if only half of America’s uninsured depositors withdraw their funds, they will risk $300 billion worth of insured deposits—and their actions would result in 190 banks facing potential collapse. However, although that fact may seem alarming enough, the paper also contains a second jaw-dropping conclusion the press has largely ignored.

On May 9, this second point attracted scrutiny because of new reporting by Pam and Russ Martens, two veteran industry analysts who’ve covered American banking since 2011 in their finance blog Wall Street On Parade. Ms. Martens has 21 years of experience in portfolio management, having served as an A.G. Edwards vice president for more than a decade after working for Salomon Smith Barney. This YouTube Video presents her testimony before the Federal Reserve in 1998, in which she argued against the repeal of the Glass-Steagall Act.

The Martens suggest that because of inaccurate mainstream press reporting, most of us believe that the current risk of bank runs only affects financial institutions similar in size or smaller than the three that failed: Silicon Valley Bank, Signature Bank, and First Republic Bank. These are not small banks by national standards but far smaller than America’s largest tier-one “megabanks” like JPMorgan Chase, Bank of America, Wells Fargo, and Citibank. Banks as large as these four are classified as Systemically Important Financial Institutions, or SIFIs, because a failure of any one of them could be reasonably expected to trigger a financial crisis. These are the kinds of institutions that, since the 2008 Great Recession, have been considered “too big to fail.”

What caught the Martens’ attention was a less-reported section of the paper where the professors argue that “the risk of run does not only apply to smaller banks.” In fact, according to their evidence, one of the four largest tier-one U.S. banks, with “assets above $1 trillion,” may already be at risk of a bank run. If a scenario like that developed, the consequences for the international banking system could be severe.

Here’s that key excerpt. The professors write:

To further assess the vulnerability of the US banking system to uninsured depositors run, we plot the 10 largest banks at the risk of a run, which we define as a negative insured deposit coverage ratio if all uninsured depositors run. . .

Because of the caveats in our analysis as well as the potential of exacerbating their situation, we anonymize their names, but we also plot SVB [Silicon Valley Bank which failed on March 10] as comparison. We plot their mark-to-market asset losses (Y axis) against their uninsured deposits as a share of marked to market assets. Some of these banks have low uninsured deposits, but large losses, but the majority of these banks have over 50 percent of their assets funding with uninsured deposits. SVB stands out towards the top right corner, with both large losses, as well as large uninsured deposits funding.

As Figure 5 shows, the risk of run does not only apply to smaller banks. Out of the 10 largest insolvent banks, one has assets above $1 trillion, three have assets between $200 billion and $1 trillion, three have assets between $100 billion and $200 billion and the remaining three have assets between $50 billion and $100 billion.

The Martens reached out to the professors to ask if they would disclose which one of the four banks is in trouble. Of course, the professors refused because a disclosure like that would open up that bank’s stock to attacks by short sellers that could drive its price and the bank’s market capitalization down to nothing. That is precisely what happened to all three banks that collapsed, and short sellers helped destroy the value of Silicon Valley Bank’s stock in less than 36 hours.

However, as the Martens point out, the problem is that short sellers probably already know the name of that bank because all they need to do is study the latest regulatory filings. Because that bank is or will soon be at risk from their attacks, the Martens urge that “federal regulators and Congress need to move this issue immediately to the top of their banking crisis priority list.”

Why Are Deposits Collapsing At America’s Three Largest Banks?

But wait, there’s more. As the Martens explain, the press also appears to be promoting a second narrative about the banking crisis. The analysts summarize it this way:

Deposits are fleeing the small commercial banks and flooding into the biggest banks that are perceived as too-big-to-fail, and thus offer a safer venue for deposits.

It turns out that’s a false statement. Instead, the data shows that deposits at JPMorgan Chase, Bank of America, and Wells Fargo actually decreased by $465 billion year-over-year since 2022, which is more than twice the amount of the deposits lost by America’s 4,000 small banks during that same period.

Moreover, it’s relatively easy to prove that fact based on publicly-available statistics recently released by the Federal Reserve Bank of St. Louis, the Federal Reserve System, and the Securities and Exchange Commission.

Here’s what the Martens have to say about this false narrative:

Because these mega banks are the same ones that the Fed has been bailing out since the financial crisis of 2008, that narrative requires believing that our fellow Americans are dumber than a stump.

We decided to check out that narrative for ourselves. Not only is that scenario wrong, but it is so decidedly wrong, and it’s so easy to get the accurate figures, that from where we sit it looks like there might have been an agenda by someone to harm smaller banks. (Since it’s short sellers who have benefited to the tune of more than $7 billion from this misinformation, the Securities and Exchange Commission should find out who the public relations firms are who placed this erroneous information, and who paid them.)

The Martens obtained that data simply by analyzing a report distributed every Friday by the Federal Reserve System titled “Assets and Liabilities of Commercial Banks in the United States – H.8.” Anybody can review that data and can even make their own charts out of it using the Federal Reserve’s software tools.

The data shows that America’s 25 largest banks lost $644 billion worth of deposits during the 12 months ending on April 26 of this year. That table also shows how the Martens derived that $465 billion total: they simply added up the deposit losses of each bank. During that period, JPMorgan Chase lost $184 billion, Bank of America lost $162 billion, and Wells Fargo lost $119 billion. The total represents 72 percent of the aggregate decline among the 25 largest banks.

Moreover, when the headlines proclaimed that big banks were witnessing huge deposit inflows due to the banking crisis, the Martens point out that the data in government filings tells an entirely different story. For example, both Wells Fargo and Bank of America saw deposits fall during the past five quarters, including the first quarter of 2023, that ended March 31. (Silicon Valley Bank collapsed on March 10.)

What’s the source of that data? The analysts report that the data presented in financial statements the banks are required to file with the SEC—and which are easily downloadable from that agency’s website—contradicts the purported press accounts of the massive deposit inflows.

Disinformation Examples?

Here’s an excerpt from one such CNN story on March 15 that reports no such data but only quotes anonymous sources (the emphasis in the following examples is ours):

“Big Banks Experience Deposit Spike After Silicon Valley Bank Collapse”

Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C) have all experienced a significant increase in deposits since Silicon Valley Bank ran into trouble last week, people familiar with the matter tell CNN. . .

In the past week, Citi has been speeding up account openings across retail banking, small business lending and wealth management, a person familiar with the matter said.

Here’s a similar story from Bloomberg on March 14:

“BofA Gets More Than $15 Billion in Deposits After SVB Fails”

The money flowing into the second-largest U.S. bank was described by people with direct knowledge of the matter, who asked not to be identified as the information isn’t public.

Could this be a coordinated disinformation campaign covertly orchestrated by the biggest banks? Because despite what the financial data may show, articles like these keep appearing.

For example, the Martens point to an “analysis” piece that ran in the Washington Post as late as April 28, presumably to grab the attention of influential elected officials and regulators in the Nation’s Capital. This propaganda-laden hit piece reads like it was actually drafted by a banking industry PR firm. Like the previous examples, it also offers no data, but in this excerpt, it curiously quotes as an authority the opinions of an obscure Canadian source:

“Why First Republic Won’t Likely Ruin Your Weekend”

This summary from the Canadian firm Palos Management explains neatly why the bigger banks are still OK:

The first quarter’s performance of the big four was consistent with a broad consensus that the big banks have capitalized on massive depositor inflows, clearly related to the well-documented liquidity stresses facing their smaller, regionally based brethren. This should come as no surprise. The panic-fueled depositor exodus from the smaller banks to the larger “too big to fail” banks is simply a rational decision. Protection of capital rules.

All in all, it’s certainly a challenge to respect the remaining credibility of a once-great newspaper like the Washington Post, while reading ridiculous language like this about “massive depositor inflows” and a “panic-fueled depositor exodus” that did not exist.