Why has the interest rate hikes caused midsized banks to fail (3 so far) in the US but NOT small banks? Note: I know why the banks failed just why the reasons don’t seem to affect smaller banks!
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The bank failures over the last six weeks were caused by a combination of 1) a lot of deposits withdrawing at the same time causing 2) the banks to sell bonds at a loss. To understand why some banks did or didn’t fail, you need to look at the makeup of deposits, and the types of loans they made.
Silicon Valley Bank and First Republic had a dangerously large share of uninsured deposits from tech startups. These are very similar companies, and they all started withdrawing money together. Almost all other banks (small, large, AND midsized) have a more diverse set of depositors, and many more deposits from retail clients like you and I that are insured by the FDIC.
SVB and First Republic took these deposits and made fixed-rate mortgage loans, and bought fixed rate bonds. While other banks (of all sizes!) have some of these assets, most banks make a lot of business loans and also issue credit cards. The key feature of these loans is that the interest rate changes (not 100% of the time, but it is extremely common). When interest rates go up, fixed rate bonds lose value. However, floating-rate loans just change the rate and their value stays the same.
Deposits fleeing causes banks to sell their loans so they can raise cash. If you are selling loans that have lost value, it has the same accounting impact as making bad loans that don’t get repaid. So banks that paid depositors by selling fixed-rate loans took large losses and were shut down.
This is not really a small vs. midsize vs. large dynamic. All banks have deposits and loans, but three banks who happened to be midsized had the wrong combination of deposits and loans.
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