With the first major bank failure since 2008 occurring last week, it’s tempting to give in to panic. After bank regulators took over Silicon Valley Bank (SVB) on Friday and then Signature Bank of New York on Sunday, many people were left wondering: Are we looking at a full-scale, national bank run or just an isolated, short-term event?
There will be a lot of discussion—about why this happened, who is at fault, and what the proper solution is. But your main focus, like ours, is probably on how these takeovers will impact transactions going forward and, more specifically, what this means for capital availability. So let’s explore your questions about these bank closures, liquidity, and middle-market mergers and acquisitions (M&A).
What is Really Happening?
The first thing to recognize is that SVB and Signature Bank are not Washington Mutual: Their failures were not due to credit quality, as was the case 15 years ago. These banks did not make a bunch of bad loans, nor did they have a significant number of borrowers with deteriorating performance.
Instead, this seems to have been a classic run on the bank, with depositors rushing to withdraw funds and banks not having sufficient liquidity to cover the demand. SVB reportedly had as much as $40 billion of withdrawals in a single day, representing approximately 23% of total deposits—a scenario that was exacerbated by some unfortunate investing decisions made by the bank, which further constrained its liquidity. But unless you are a customer of or an investor in one of these banks, you have little to worry about: the failure seems to be bank-specific rather than widespread, making the risk of bank contagion very low.
What Does It Mean for the Rest of Us?
The easy availability of bank capital has changed somewhat since last Friday, but the true impact of the seizure of SVB and Signature Bank (and any others that may be taken over in the near term) will be driven by depositor behavior in the coming days. Even if nothing is wrong with a bank or its underlying assets, a significant withdrawal event would undermine that bank’s ability to operate—and ultimately, to survive.
In recent history, only four banks have been “too big to fail”: Bank of America, JP Morgan Chase, Citigroup, and Wells Fargo. In other words, the global economy would likely collapse if one of those money center banks failed, so the US government would step in to prevent that from happening. As depositors flee to the safety of these giant institutions, the flood of funds out of regional and local community banks could cause concerns about the viability of those smaller institutions.
Government action over the weekend should quell (or at least dampen) this behavior. The US Treasury has promised no depositors will lose their money at SVB or Signature Bank. Furthermore, other banks will be allowed to borrow from the Federal Reserve on favorable terms, which should stem any liquidity crises these banks may face. Meanwhile, you may find that regional and local banks are more protective of their balance sheet and temporarily constrain their lending activities.
What about Your M&A Transaction?
Many M&A transactions rely on the availability of bank capital to fund a portion of the purchase price. Access to capital has already been reduced over the past few quarters as interest rates have climbed and recession concerns have increased; the failure of SVB and Signature Bank could cause other banks to further tighten their credit policies and/or pricing in the near term. For that reason, if your business is in the process of an M&A transaction (or just beginning to consider the sale process), expect the following changes in the lending market over the next 30 days:
- Regional and local banks’ tighter credit policies will lead to smaller loans being extended.
- These banks will increase pricing to compensate for their additional perceived risk.
- These smaller banks will also pay closer attention to performing due diligence on new customers.
We envision this as a temporary adjustment in the financial landscape, isolated among smaller, regional, and local lenders, followed by the markets returning to their former position in the coming months. We also anticipate a continued increase in lending from nonbank lenders, echoing the upward trend of the past several years, which will offer borrowers more alternatives to a traditional lending relationship.
Even though this modern-day bank run is a major event with clear impacts on the banking and stock markets, we feel confident that the outcome will be right-sized quickly. The liquidity of regional and community banks should not be threatened, and things will return to the status quo. At worst, you may experience a delay in your M&A transaction. In the meantime, we remain vigilant, but we harbor no real concerns about any long-term impact on middle-market M&A activity or the value of those transactions.