Despite the federal government stepping in to save members of recently collapsed banks, including the Silicon Valley and Signature banks, many remain anxious and question if their money is safe in their financial institutions. They wonder, in light of the ripple effect created on major banks and smaller, regional banks alike, what the failures mean to their businesses, the economy, and the government.
Some strategists expect more issues — but not a full-blown crisis — in the banking sector. Andrew C. “Drew” English III, a member with Callison Tighe in Columbia, recently spoke with Lawyers Weekly about these issues and more.
English focuses his practice on commercial real estate acquisition and development, representing developers in all aspects of their projects. He also represents lenders in purchase money financing, refinancing of existing loan facilities, and workouts of nonperforming loans.
English graduated from Wofford College in 1995 with a bachelor’s degree in finance before earning his J.D. from the University of South Carolina School of Law in 1998.
What concerns have you heard from your clients in light of the collapse of Signature Bank and Silicon Valley Bank? A. No specific concerns relative to SVB or Signature Bank from my transactional clients, but there is concern generally in the market as to the safety — perceived or actual — of smaller banks.
What advice are you giving those clients? A. I have not seen panic in my commercial clients, and that is what my advice would be: Don’t panic, your bank is very likely safe, and panicked bank runs will only lead to more failures. No bank has enough cash on hand to handle a run where all depositors take their cash. Most commercial clients are focused on rates, as trillions of dollars of loans will mature over the next 12 to 18 months, and they will not be refinanced at rates anywhere near what they had. That means cash flows such as rents will not support the new, higher debt service payments. It’s not hard to see the vicious cycle. Rates go up, loan payments go up, rents go up, and finally prices go up and unemployment could follow. Or if rents do not go up, or tenants don’t or can’t pay, the foreclosure rate will inevitably increase.
What type of ripple effect do you believe the collapses have had on major U.S. banks and smaller, regional banks? A. Mainly fear, fear of the unknown. Strangely, it can be like a reverse FOMO [fear of missing out]; that is to say, if I don’t get my cash out, there may not be any left tomorrow. I feel like we have moved past that initial shock of SVB and Signature Bank, but there are plenty of worried folks still out there.
Is there such a thing as a bank being too big to fail? A. Technically, no, but practically, probably yes. I say probably because I can’t see the government allowing one of the “Big Five” banks — Chase, B of A, Wells, U.S. Bank or Citigroup — to fail. However, if two of those are in trouble or throw in another large bank such as PNC, Truist or BNY Mellon, then all bets are off, and all we will be able to do is hold on.
The current administration has indicated that it would ask Congress and banking regulators to “strengthen the rules for banks” to reduce the risk of bank failure. What might this look like? A. A new model for lending. Examples may be a requirement to have more cash reserves on hand; implementation of tighter lending practices such as underwriting requirements which look more closely at the value of the assets and collateral, creditworthiness of the borrowers, equity, cash flow, etc.; and lending at lower loan to value ratios, which means that borrowers will have to inject more equity in the deal. All of these might sound good in theory, but they will be much more difficult to implement in the real world as they will further burden struggling borrowers. Banks can’t just stop lending, which is essentially what happened in the late 2000s in the real estate world. The net income of banks is directly correlated to the loans they make — they pay interest on deposits at one rate and lend money out at a higher rate. When lending slows, net income decreases. The Fed and Treasury need to pull off a controlled crash landing and try to reduce the severity of pain and duration of that pain [for lenders, borrowers and consumers], which will be a challenge, especially in this partisan environment we find ourselves in. •
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