Regional banks were all ‘guilty until proven innocent’ after Silicon Valley Bank, Citizens CEO says

Regional banks were all ‘guilty until proven innocent’ after Silicon Valley Bank, Citizens CEO says - Business and Finance - News

A Year After Silicon Valley Bank’s Collapse: An Interview with Bruce Van Saun, Head of Citizens Financial Group

When I arranged an interview with Bruce Van Saun, the CEO of Citizens Financial Group, the 14th largest bank in the United States, for a piece marking the first anniversary of the collapse of Silicon Valley Bank (SVB), I didn’t anticipate being hit with a wave of déjà vu. However, news from New York Community Bank (NYCB) during that week brought back uncomfortable memories of the previous year’s banking crisis.

NYCB announced they had identified a “material weakness” in their lending operations, which resulted from ineffective oversight, risk assessment, and monitoring activities. Essentially, individuals responsible for identifying potential problems within the company had failed to do so. The revelation came after reports suggested that NYCB was searching for investment to bolster its position, leading to a significant drop in the bank’s stock price.

Although other regional bank stocks experienced similar declines during SVB’s collapse, most were faring better during NYCB’s troubles. However, it was a different story on March 10, 2023. Other regional banks suffered significant losses as well, with most seeing their stock down by double-digit percentages.

It has been a year since that pivotal day marked the beginning of a series of subsequent bank failures. Although the banking industry as a whole appears stronger, it faces challenges. One of the most significant concerns is commercial real estate loans that have soured due to high office vacancy rates and remote work. As a result, many landlords have had to slash rent or sell properties at a loss, potentially leading to significant missed loan payments.

Federal Reserve Chair Jerome Powell warned senators during his semi-annual testimony that there will be bank failures due to these issues. I sat down with Van Saun to discuss how he views the banking industry one year after SVB’s collapse and what lies ahead.

**Interviewer (I):** I know you would probably prefer to focus on the present rather than last year’s banking crisis, but I must ask: In your opinion, what caused the bank failures?

**Bruce Van Saun (BVS):** Last year’s bank failures are often referred to as regional bank failures. However, they were idiosyncratic failures. Both SVB and Signature Bank grew rapidly, accumulating large uninsured deposits and serving narrow customer bases, making them susceptible to deposit flight risk.

They also borrowed short and invested long, which is a cardinal sin in banking. Poor management of interest rate risk was another issue because they lacked the experience that comes with growing slowly over many years and being heavily regulated like larger banks.

**I:** Regarding responsibility, who do you think deserves more blame: the failed banks’ management teams for not implementing proper guardrails or financial supervisors for not identifying red flags?

**BVS:** It’s a joint failure. The first line is the board and management. They should avoid making poor strategic decisions, such as SVB’s relentless pursuit of growth and acceptance of hot money, followed by investments in long-term Treasuries.

The regulatory process is supposed to challenge these shortcomings, but it failed in this instance.

**I:** Despite not experiencing the same issues as the banks that collapsed last year, your stock still suffered significantly along with almost all regional banks. What was that experience like for Citizens?

**BVS:** There was a perception of guilt by association in the industry, with investors assuming we were next to fail unless proven otherwise. We had the facts – strong capitalization and a stable deposit base – but needed to communicate them effectively to the public.

We focused on maintaining deposits, liquidity, and capitalizing on opportunities arising from other banks’ failures. The high demand for new accounts sent a positive message to the market that Citizens was a safe bank.

**I:** How has the past year changed Citizens’ business model?

**BVS:** One thing that has become clear is that deposits will cost more. Consequently, where we lend those deposits is increasingly important.

When the Fed was injecting vast amounts of money into the system and there were ample deposits, we could engage in activities that were accretive to our bottom line but perhaps not strategic.

We had been in the indirect auto loan business and had flow agreements with SoFi and Affirm, selling some of their loans and sharing risks for fees. However, we decided to solidify our deposit base instead.

**I:** Regarding NYCB, do you think they’ve turned the corner after securing a $1 billion investment and undergoing a major management overhaul?

**BVS:** The stock market’s reaction to NYCB’s troubles led many to fear, “Here we go again, another bank failure is imminent.” However, the investment from outside sources and the appointment of Joseph Otting as CEO will significantly reduce those chances.

NYCB will gain credibility with regulators under Otting’s leadership, who previously navigated OneWest Bank through a period of stress and ultimately sold it to CIT Group for $3.4 billion.

**I:** Do you see NYCB’s situation as a sign that more trouble may be on the horizon for the banking industry?

**BVS:** The situation at NYCB is unique, as it involved the merger of three banks in a short timeframe and crossing the threshold requiring larger capital reserves.

However, commercial real estate remains a concern. With office vacancy rates at an all-time high and remote work continuing, many banks could face significant losses in this sector since close to one-fifth of their loans are there.

To prepare for potential high losses, Citizens is carefully evaluating its commercial real estate portfolio and putting up substantial reserves against any potential losses. The process is ongoing, with senior management closely involved. Overall, the banking industry will need to be vigilant in managing these risks.