Solid capital positions, liquidity seen as strengths

Higher interest rates, massive uninsured deposits and ties to the cryptocurrency industry led to the demise of Silicon Valley Bank, Signature Bank and Silvergate Bank.

In the 1980s, Portsmouth Savings Bank, housed continuously in the oldest bank building in the country since 1823, was a flea in the ear of then-Bank Commissioner Roland Roberge, who was troubled that government bonds represented some three-quarters of its assets.

“It’s not a bank,” he would say, “it’s a bond fund.” Had the bank not been acquired but continued doing business as usual, it would not have survived the turmoil currently roiling the industry.

Since the Federal Reserve began tackling inflation a year ago, interest rates have jumped from .08 percent on March 7, 2022, to 4.75 percent on March 23, 2023 — the fastest rise ever. As one Wall Street wag put it, “When the Fed hits the brake, somebody goes through the windshield.”

One of those somebodies was Silicon Valley Bank, where fixed-rate government bonds represented 60 percent of all assets. As interest rates climbed, the value of SVB’s bond portfolio fell — from $91 billion to $76 billon by the close of 2022 — as investors turned to new bond issues bearing higher yields. Moreover, more than 90 percent of the bank’s deposits, many held by venture capital and startup firms, were uninsured, about double the average for all banks.

On March 8, the bank sold bonds with a book value of $23.9 billion at a loss of $1.8 billion to trigger its fall. The next day, a major investor tweeted the bank could fail. Greg Becker, president and CEO of SVB, replied the bank was “actually quite sound” only to see its stock drop 60 percent, depositors withdraw $42 million within hours and the bank failed.

The largest American bank to fail, Washington Mutual in 2008, staggered for eight months before collapsing. Bad news travels fast in the age of social media. SVB, the second largest failure, was gone in two days.

Soon after the SVB failure, two other banks — Silvergate Bank, another California bank, and New York-based Signature Bank — were liquidated by federal officials. Both had strong ties to the cryptocurrency industry. And Credit Suisse, the Swiss banking giant, was taken over by its rival UBS in a merger forced by the Swiss government.

A report posted by the Social Science Research Network, “Monetary Tightening and U.S. Bank Fragility in 2023,” found that 186 banks, with balance sheets mirroring that of SVB are at risk from rising interest rates and high volumes of uninsured deposits. According to the Federal Deposit Insurance Corp., U.S. banks are sitting on $620 billion in unrealized losses from depreciated government bonds and mortgage-backed securities.

Strong capital positions

What has all this got to do with New Hampshire banks? Apparently, very little.

Of the 43 banks operating in New Hampshire, just 16 are chartered, regulated and supervised by the state. The 27 others include offices of community banks chartered in neighboring New England states as well as regional banks like Citizens Bank, TD Bank and M&T Bank.

The 16 state-chartered banks, all but a handful of them mutual savings banks, control 24 percent of the market as measured by deposits, while Citizens Bank and TD Bank control nearly half. If there is any risk to the banking system in New Hampshire — as yet, there is no sign that there is — it is more likely to lie with the regional rather than the community banks.

Greg Tewksbury, president and CEO of NH Mutual Bancorp, a holding company that includes three independent banks — Merrimack County Savings Bank, Meredith Village Savings Bank and Savings Bank of Walpole as well as NH Trust — said that New Hampshire banks are well positioned to withstand the challenges of the changed financial environment.

All have strong capital positions, well above regulatory minimums, as well as ample liquidity, Tewksbury said. These banks primarily serve retail customers and consequently have broad deposit bases with little or no uninsured deposits. He stressed that loans, not government and mortgage-backed securities, account for the bulk of assets, and that balance sheets are well matched to hedge against interest rate risk.

Tewksbury expects the primary effect of the changed interest rate environment on New Hampshire banks will be limited to a drag on earnings. He explained that higher rates place upward pressure on deposit costs while loans reprice at a slower pace, squeezing the margin on earning assets.

In a statement, NH Bank Commissioner Emelia Galdieri emphasized that the Federal Reserve established the Bank Term Funding Program, pledging loans to provide banks with extra liquidity. At the same time, the federal government has protected the depositors of the failed banks regardless of the amount of their deposits.

Moreover, the commissioner noted, in the 90 years since the FDIC was established in 1933, no insured depositor has ever lost a penny.

Of all the 43 banks operating in New Hampshire, just 16 are chartered, regulated and supervised by the state. The 27 others include offices of community banks chartered in neighboring New England states as well as regional banks.