There’s knowing something about the ripple effects of the latest bank collapse crisis; and then, there’s knowing enough to confidently stand up in a room of finance executives and do a presentation on it.
Jerome Fusco, managing director at Sax LLP and leader of the firm’s investment banking arm, Sax Capital Advisors, fits into the latter group. He’s been tasked with filling in senior people at his Parsippany-based accounting, tax and advisory firm about recent banking sector events.
That includes, of course, the headline-dominating failures of Silicon Valley Bank and Signature Bank, which prompted federal regulator takeovers. It also includes banking sector peers deciding to inject $30 billion in deposits into another bank that experienced a stock market tumble and fleeing depositors, First Republic Bank.
In the wake of that, Fusco has reviewed local bank metrics to evaluate how much New Jersey’s businesses and consumers should brace for impact themselves. And the finance expert, a banking industry nonpartisan who sits on the sector’s outskirts, shared with ROI-NJ what he’s learned. …
ROI-NJ: How reasonable is it to look at these recent events — with the economic turmoil of 2008 perhaps still fresh in mind — and start to think, ‘This again?’
Jerome Fusco: Any disruption to the health of the country’s banking sector can clearly have a systematic impact because of the importance of the ability to lend money and the safety of cash and deposits. In terms of the similarities to 2008, there was the same initial onset panic. But, it was a different type or crisis, or event. It was an interest rate, liquidity, solvency event. It wasn’t driven by credit. The primary driver wasn’t Silicon Valley Bank’s ability to collect on its loans or having bad customers or products at a bad value. It was driven by rapid changes to interest rates and potential losses on their investment portfolio, as well as a run on the bank. What’s different between 2008 and 2023 is the spread of information. Obviously, you had the internet in 2008, you saw things on CNN and in the Wall Street Journal. But, now, you have all these platforms: TikTok, Instagram, Twitter. It’s all in your face. And that can make people nervous and reactionary. Even if social media has done a lot of good, it can also exacerbate something like a bank run.
Any time there’s something in the banking industry, especially in the depository industry, the excitement comes out of a negative concern — people don’t get too excited about a savings or loan product. When things are happening, consumer and business sentiment is impacted. I think the government stepping in and guaranteeing deposits, backstopping deposits, lines of credit for other banks, showed that the country’s business and personal deposits will be guaranteed. They’ve shown they’re not going to let people lose money. That was very important. If you think about that compared to Lehman Bros. being allowed to fail, I think there’s some looking back to the past at how the banking system can be crippled and how it can be taken to the brink. They’re also working with other banks and institutions to backstop some others not as in dire straits, like First Republic, but might need some shoring up.
ROI: Is that chain of events heightening anxiety in the New Jersey market to a significant degree?
JF: All of that definitely enters into the mindset of Jerseyans, because we all know what’s going on with banks in other states and how that can impact the local economy. Signature Bank is obviously top of mind because they’re a New York lender and a lot of our businesses do business with them. They loan to a lot of industries that traditional banks might not. So, that created some nervousness in New Jersey, even if there seems to be a willingness to step in and support these institutions. Clearly, there’s been a little bit of a flight to safety, with people moving deposits from regional banks to larger banks. I would caution against that for a number of reasons, including that we don’t want another major run. The community banks and regional banks are critical to the backbone of lending in the United States. They lend to people and businesses, towns and areas that larger banks may not seek exposure to, which is part of why they’re so critical. A bank like M&T Bank — or the Provident, Valley and Columbia banks of the world — they’re very well capitalized. If you think about this industry being under scrutiny right now, the equities of these banks haven’t been heavily penalized recently. They’ve sunk down along with the other banks in the sector, but there hasn’t been a single name that’s causing concern in this area that I’d raise a red flag to at this point.
ROI: In the lead-up to this, there seemed to be a lot of reassurances given from now-strained banks about the health of their portfolio that might not have been totally warranted. How sure can we be, in spite of that, that the banking picture in a place like New Jersey is still optimistic?
JF: I wouldn’t say anything is overly optimistic, but the financials that exist and the balance sheets among local New Jersey banks are fundamentally stronger than the ones at Silicon Valley Bank or Signature Bank. I haven’t gone through every bank’s financials, but the bigger ones, such as those I named earlier, seem a lot more sound in terms of making comparisons. Signature Bank had a cryptocurrency arm, too, so that’s a little different … but, at Silicon Valley Bank, their interest rate risk in theory would’ve wiped out all of their equity. At the local banks I named, that would be less than 1% to 2% of their assets. So it wouldn’t be the best scenario, but it would be more of an earnings hit — meaning it wouldn’t be the best thing for equity holders — more than it would be a solvency issue, which affects their lenders and companies doing business with them.
ROI: What should we be watching for in the coming weeks? What developments might influence the course of this?
JF: Well, that’s what brings back into play the Federal Reserve and their view, and what’s going to be done with interest rates. (Federal Reserve Chair Jerome) Powell has made it very clear for the past 12 months he wants to raise interest rates to cool inflation. It’s really the main tool he has left to do that. The Fed doesn’t look at any one sector and determine, for example, that because of our impact on the automobile manufacturing industry we’re going to slow down raising rates because it’s detrimental to that business. With that being said, the interest rate’s impact on these banks’ solvency and on their balance sheet, could have a detrimental impact to banks. So I think there’s some expectation they’ll slow the rate increases down — if not come to a halt — because of that. The health of banks, and the ability to have a strong U.S. regional banking system, is critical to every other aspect of business. You need lots of solvent banks. And I don’t think the Fed would risk that part of the economy to stop inflation. The downside is that inflation will remain challenging until this gets under control. Outside of that, it’s a wait-and-see approach. Look for messaging from all banks. I’m not saying there’s a next shoe to drop, but if there’s something that wasn’t apparent, or if some banks were misreporting or didn’t have a good handle over their finances before this — regulators are going to be all over that.
ROI: Any other advice that this might serve as an opportunity to impart on our audience?
JF: For consumers or businesses, if you even just ignore what happened here and assume there’s an event that happens to your bank — something as simple as your bank being in a flood zone and has the misfortune of getting flooded, or the bank is hacked — it wouldn’t be the worst thing in the world for you to have another bank with Treasury function for risk. Another bank could step in and help your payroll and your operating expenses. And, the fortunate thing is it wasn’t needed in this case. People were worried about making payroll, but no one lost a dime. With that being said, despite the Fed being able to step in, from an operational standpoint, you should think about risk management and what you would need in a pinch. You can’t foresee everything, but it’s not that difficult to maintain a relationship with two banks.