Bankers look back on the bank failures of spring 2023 and share some lessons learned and strategies for success.
By Monica C. Meinert
It’s been almost a year since the turbulent spring of 2023 that saw the failures of three large regional banks. While the failures of these institutions were due in large part to idiosyncratic factors, it was nevertheless a reminder to all banks of how quickly deposits can migrate—and just how important it is to have an action plan in place to respond to an acute stress scenario.
Among other things, banks are beefing up their resources and focus around liquidity management. “Liquidity seemed like it managed itself for a long time,” but that has changed significantly since the spring 2023 failures, acknowledged Laura Butler, CFO at First Citizens National Bank, who spoke on a panel during the ABA Annual Convention last fall.
Butler’s bank is a $2.4 billion community bank headquartered in Dyersburg, Tennessee. From a liquidity standpoint, she notes that in the wake of the regional bank failures, “everything across the board in our liquidity management program has expanded. It has required more strategic focus—on things like policy and our contingency funding plan. It takes up a lot more of my time than it did.”
Early warnings
In the leadup to the regional banking crisis, Brian Gilbert, treasurer at Nashville-based Pinnacle Financial Partners, credits his bank’s diligent monitoring of and response to early warning indicators for putting them in a good position by the time SVB failed.
One of the many metrics the bank monitors is the overnight liquidity premium. “Back in 2022, the OLP started to jump,” Gilbert says. At first, he assumed it was simply a reaction to the Russian invasion of Ukraine. “But in March, it showed up even higher, and by April it was up to levels that were higher than what we saw in March and April of 2020” when the COVID pandemic began. “I started looking at the [Federal Reserve’s] M2 forecast and noticed that the market was reacting quickly to the implementation of tightening and rates going up.”
Gilbert’s intuition told him that “all we’re going to be talking about by the end of 2022 is deposit volumes,” and that the bank needed to act. In response, Pinnacle developed three new deposit verticals, and was able to successfully raise deposits. “By the time the Silicon Valley Bank/Signature Bank failures occurred, we had grown deposits [substantially], which put us in a really nice position of cash and liquidity going into the crisis.”
Gilbert notes that during the period of stress, his team followed the bank’s contingency funding plan, which “worked very well for us,” and that the bank has since adapted its plan based on lessons learned from that event. Among other things, the bank is working on collateral optimization, “making sure that we’re getting the maximum value out of all of our securities and loans.”
Reputation at stake
For banks of all sizes, the SVB and Signature events were a reminder of how quickly things can shift—and how critical it is for banks to have a plan in place to respond.
Butler notes that her community bank “has stepped up our social media policies and plans and more closely tie them into our contingency funding plan. Even at our size, it’s important to do that.”
Gilbert adds that Pinnacle has plans in place to be able to react within eight hours of a media event, recalling how during the crisis, an analyst report came out on held-to-maturity losses at regional banks. He noticed that the report contained inaccurate information about the bank’s position: In reality, “we would only have only lost 0.7 percent if we had taken those losses—[the analyst] had us losing 5 percent.”
Fortunately, the bank’s CFO was able to immediately contact the analyst and the report was reissued with the correct information. But Gilbert notes that without quick action by the bank, “we could have taken a hit without doing anything wrong.”
Doug Croker, head of funding and liquidity, economic capital and business intelligence at Regions Bank, recalls that a big lesson he learned from the SVB/Signature meltdown is how isolated problems in a particular corner of the banking sector can quickly become “a name-oriented problem for other banks,” regardless of how healthy those banks’ balance sheets might be. “We went through a regional banking event,” Croker quips. “I work at Regions Bank. The name was in the crisis.”
Similar to Pinnacle, Croker notes that at the height of the SVB crisis, inaccurate information was also circulated about his bank. “We don’t even have [HTM], but they were showing a massive HTM loss. The analyst got it wrong.”
The takeaway, he shares, is that “you can’t keep your head down and stay in your own balance sheet. You need to look at what other people are saying about your balance sheet.”
Testing, 1-2-3
In addition to monitoring from a reputational perspective, banks must continually test their balance sheets, systems and processes to ensure they’re well-prepared to react to significant stresses like those seen in the spring of 2023.
“We test the discount window, Bank Term Funding Program, we move collateral—and we do it all in the same day,” Croker says. “I want to know I can move collateral from space to space. You need to know you can do substantial volume in a day. It’s an exercise for the operations team, and it’s imperative.”
The bank also keeps the traditional disciplines of corporate treasury seated physically close to one another, including asset liability management, debt and capital, stress testing, liquidity risk management, investment portfolios and trading. “There’s no siloism across these disciplines,” he says.
At First Citizens, Butler says she runs a scenario every month, “to prove that we know at any given time if we have a significant adverse scenario, exactly which bonds we’d sell.”
For a smaller bank with fewer resources and staff, stress testing can be daunting, but she emphasizes that “you have to take a deep breath and get back to basics. The main thing is, you have to know your customers—what businesses are doing, what their trends are.”
