Silicon Valley Bank’s failure in March 2023 was a watershed moment for the banking sector. The $210 billion collapse was the third-biggest in American history, sending shockwaves throughout the industry and exposing the solvency issues created by rising interest rates.
Columbia finance professor Tomasz Piskorski is one of the leading experts in surveying the post-SVB landscape, as one of the co-authors of a widely read 2023 study estimating a $2 trillion decline in banks' asset values after the monetary tightening of the previous year. At the Fortune Future of Finance conference in New York City, Piskorski said the long-term consequence of higher-for-longer interest rates and new regulations will mean banks becoming less central to the financial system, as private credit and nonbank mortgage lenders such as Rocket Mortgage pick up the slack.
“Banks continue to become increasingly less relevant, especially smaller-to-mid-sized banks,” Piskorski, Columbia’s Edward S. Gordon Professor of Real Estate, said Thursday. “Because of consolidation in the banking industry, I predict that in two years, we’ll have much fewer smaller-to-mid-size banks.”
Banks are being forced to confront new risks post-pandemic, as tight Fed monetary policy devalues many of their loans and real estate holdings. They’re also contending with a string of bank failures that have exposed how quickly a seemingly stable bank can go under. Last March, Santa Clara-based SVB collapsed virtually overnight after depositors withdrew $175.4 billion in deposits in a matter of days.
SVB’s clients started pulling their deposits after concerns circulated relating to losses the bank sustained on its long-term Treasury holdings, which went underwater after the Fed started hiking interest rates—so-called “duration risk.” SVB simply couldn’t handle the speed of the bank run, requiring the FDIC to step in and repay depositors: A new problem banks are being forced to contend with.
“Regulations we have around liquidity were written before a time that you could move millions of dollars from a tiny device in your hand while on the subway,” Adrienne Harris, Superintendent of New York State’s Department of Financial Services, the state’s financial regulator, said. “You see 20% of deposits leave an institution in four hours. We’ve never seen anything like that before.”
Bank runs aside, the macro conditions that led to last year’s bank failures haven’t gone away—Piskorski said there are likely many banks facing the same hidden solvency issues as SVB.
“There are quite a few banks in the United States right now that have very similar risk characteristics [to SVB],” Piskorski said. “[They] have the market value of their assets being less than the face value of their debt…In principle, if the depositors show up, there’s bank runs—unless, of course, regulators step in.”
Commercial real estate has emerged as a key area of concern for banks and regulators. Office buildings’ values have plunged post-pandemic as the rise of remote work has decreased demand for in-person desk space, leaving many banks on the hook for expensive real estate loans they signed a decade ago. They’re being forced to kick the can down the road by refinancing at high rates, sell their properties for pennies on the dollar, or default.
Midsize banks are especially exposed—they hold around 40% of their assets in CRE loans, according to Piskorski. That overweight exposure has already generated banking flare-ups, such as New York Community Bank’s emergency bailout in March.
“In general, the banking sector is very stable. Federal regulators did a wonderful job last spring…to contain the contagion that we've started to see across the banking sector from SVB and then to Signature [Bank], but there are still risks in the sector at large,” Harris said. “A lot of regulators, federal and state, are watching commercial real estate very closely.”
Piskorski predicts that as struggling CRE portfolios and duration risks continue to weigh heavily on the banking sector, industry-wide tightening is on the horizon, potentially in the form of consolidation—and new, more nimble forms of lending will pick up the slack. New regulations potentially mandating higher capital requirements will also force smaller banks to tighten their belts, cutting down on their margins and creating opportunities for private credit or nonbank lenders such as Rocket Mortgage.
“If the regulators decide to crack down, we'll see further contraction of smaller and mid-size banks,” Piskorski said. “We’ll see growing [market share for] debt securities and private credit.”
