Not all bank failures are the same, broker says

Erin Sykes warns against taking too general a view of industry turmoil

Not all bank failures are the same, broker says

A rose may be a rose, but not every bank succumbing to financial stress is the same. As such, one real estate broker warns against lumping all of them together to suggest systemic, industry-wide failure.

Erin Sykes, chief economist at NestSeekers International, spoke to Mortgage Professional America to note distinctions among financial institutions succumbing to turmoil. First, Silicon Valley Bank was shut down by regulators on March 10 followed by Signature Bank two days later. First Republic Bank then unwittingly entered the fray after spooked wealthy depositors withdrew deposits en masse.

“Those are totally different than First Republic Bank,” Sykes told MPA during a telephone interview. “It has a lot to do with who their clients are.”

Why did Silicon Valley Bank and Signature Bank fail?

Silicon Valley Bank, for example, had focused largely on startups while Signature Bank did a brisk business with depositors dealing in cryptocurrencies.

“Silicon Valley Bank focused on startups and that’s a highly risky business, and there had been significant withdrawals,” she said. “Similar to Signature Bank, which has a lot of crypto-focused customers thus they have a really risky client base too.”

Exacerbating the turmoil is the backdrop of inflation that’s made prices go up: “That acknowledged why they would have so many capital withdrawals recently and things have gotten more expensive as people have had to dive into their savings.”

She reiterated what she told CNBC in breaking down the differences between First Republic and Silicon Valley Bank, which dealt largely with funding startups. “First Republic is much more stable in the long term,” she said of the San Francisco-based institution. “They have high, high net worth clientele that is diversified not only across different banking systems but with their investments. That said, I’m not making excuses for them.”

What is special about First Republic Bank?

The bank also deals extensively with jumbo loans given their customer base: “They are a huge jumbo loan originator because of that high-net-worth clientele,” she said. Media reports have noted many of those wealthy depositors’ accounts exceed the level for which the FDIC guarantees protection – thus the mass withdrawals.

And then there’s the ARMs snapshot: “They also have a huge exposure to ARMs,” Sykes said. “They have 40% of their mortgage business in 7/1 ARMs and 25% in 5/1 ARMs.”

Overall, the effect of inflation is part of the mix too as many secure their funds, Sykes noted. “As things have gotten more expensive as people have had to dive into their savings, of course they’re withdrawing that cash they had hoarded the last two years. When credit card payments were strong and everyone had the least amount of credit card debt in history now we have the most amount of credit card debt. How quickly that changed in one year.”

Others have noted the different nuances in the banking turmoil in separate interviews with MPA. Kimberly Jay, a broker at Compass, noted the differences among various US markets in positing that the impact won’t be a wholesale one. “Real estate is local,” she said during a telephone interview. “Not all markets perform the same way. Manhattan market isn’t the same as the suburban market, it’s not the same as Florida, LA, Kansas City, etc. Let’s start off with that.”

Lee Smith, senior executive vice president and president of mortgage at FlagStar Bank, made similar arguments. “The Fed obviously believes what is happening in the banking industry is contained, it’s idiosyncratic, and not systemic,” he told MPA. “So given the actions it’s currently taking, they don’t believe it’s going to have a contagion effect. Having said that, I think they are watching what has happened and I do think they’re going to slow the rate of their increases down versus what they were doing in 2021.”

He suggested he’d wait until the data emerge before coming to further conclusions: “You’re going to see unemployment increase because there are a lot of companies in ’23 that focused on cost structures, and at some point that’s going to have an impact. And with everything that happened in the banking industry, it’s probably going to have an impact on credit availability at some point. I think the Fed is also banking on that having a positive impact on inflation as well as the actions they’re taking.”