Financial Systems 

A bird's eye view of a city center at night.

The U.S. banking system, especially large regional banks, came under fierce pressure in March 2023 with the collapse of Silicon Valley Bank (SVB). The bank was shuttered, and was followed by Signature Bank, which faced similar issues. To keep panic from spreading, the FDIC guaranteed all customer deposits at both banks. The move calmed fears and stemmed the deposit outflow, but not before a third bank—First Republic—toppled and had to be sold off. The turmoil left questions about whether the problems that sank the three banks had been rectified. The mechanics of the meltdown were clear: Rapidly rising interest rates had depressed the value of banks’ bond or loan portfolios, resulting in insufficient capital to cover withdrawals. But how had three major financial institutions, together holding over $530 billion in assets, been allowed to mismanage liquidity risk?  

The bank failures have led regulators to tighten oversight. Investors should expect heavier capital and liquidity requirements to raise the cost of doing business for banks over the coming years. Regulators are still hammering out details of the so-called Basel III “endgame” capital requirements and new, more stringent stress tests, but we believe the upshot will be larger capital buffers and other safety measures for banks beyond simply those that are “too big to fail.” 

What we’re watching

  • Regulatory risk 
  • Basel III endgame capital requirements 
  • Net interest margins 
  • Commercial real estate risk 
  • Mega-banks vs. mid-tier and smaller regionals 
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The cumulative forces of heightened oversight, rising interest rates, and rapid technological change are reshaping the banking business and, in some cases, shifting money away from traditional financial institutions toward new players.

TD Cowen Research