The government takeover of Silicon Valley Bank and Signature Bank has bank customers large and small on edge. And while the banks failed for different reasons, the combination of a rapid rise in interest rates and high levels of uninsured deposits has also put stress on banks in Colorado and everywhere else.

“The recent bank closures in California and New York appear to be outliers and not reflective of the norm for banks across the United States and Colorado. The California bank had significant concentrations of tech and venture capital clients while the N.Y. bank had a significant concentration of cryptocurrency clients,” the Colorado Bankers Association said last week in a statement.

A research paper by finance professors Erica Jiang, Gregor Matvos, Tomasz Piskorski and Amit Seru, however, estimates that the nation’s banks are sitting on $2 trillion in unrealized losses in their investment portfolios because of higher interest rates and that 186 more banks could fail if they were to lose just half of their uninsured deposits.

“If one looks at the real books of all 4,236 FDIC-insured commercial banks, i.e., if one marks their balance sheets to market, over half are insolvent!” estimated Larry Kotlikoff, a University of Boston economist in a recent blog post.

The Denver Post studied call reports for 17 banks with 1% or more of the FDIC-insured deposits in Colorado — about 83% of the total — as well as four smaller Colorado-based banks that doubled their deposits during the pandemic. The group of 21 banks was compared to the three banks that failed this month — Silicon Valley Bank (SVB), Signature Bank, and Silvergate Bank — to look for any similarities in deposit growth rates, levels of uninsured deposits, and dependence on interest-rate sensitive investments versus loans.

Three banks in the state had faster deposit growth than SVB and Signature, but none had as high a share of uninsured deposits, although close to half of deposits at the banks studied are not guaranteed. The Colorado banks did a better job than the failed banks at converting deposits into loans, leaving them less exposed to investment losses tied to higher interest rates.

“Unfortunately, we are finally beginning to see some of the unintended consequences of raising rates so fast. Interestingly, the fallout of higher rates is currently coming through in the U.S. banking sector, an area most assumed would be one of the largest beneficiaries of rate hikes,” said Anthony Saglimbene, chief market strategist with Ameriprise in an email.

Rapid deposit growth

Closures and other restrictions made it harder for people to spend money during the pandemic, and while some households found themselves financially depleted, the savings rate overall soared for most and wealth increased, especially for homeowners. The federal government also pumped trillions of dollars into the economy, including $66 billion in Colorado, with some of that money ending up as bank deposits.

At the 72 banks based in the state, deposits grew nearly 60% over the past three years, according to the FDIC. Of the 17 banks most active in Colorado, total deposits increased a more modest 30% over the same period, due in part to lackluster growth at Wells Fargo, the state’s largest bank with control over a fifth of deposits.

Deposits at HTLF, the Denver-based bank formerly known as Citywide Banks, rose from $1.83 billion to $9.2 billion in the past three years, a remarkable 335% increase that was highest measured of the banks analyzed. But HTLF is rolling up 11 community banks into one charter and the big gain mostly reflects the combination of five smaller banks rather than new money.

“Deposits increased as a result of our bank charter consolidation project and represent the aggregation of the deposits of our affiliated banks. HTLF conducts its business through multiple banks operating as either independent entities or independently branded divisions,” said Amy Printz, a spokesperson for the bank.

Solera National Bank, based in Lakewood, had deposit growth of 269%, while Points West Community Bank in Windsor was up 252%. Other Colorado banks that doubled their deposits during the pandemic include Timberline Bank in Grand Junction, First Western Trust Bank in Denver and Mountain Valley Bank in Walden.

While slow or no growth is hardly a sign of health, bank failures tend to be more common at institutions that in hindsight grew too rapidly during a heated economy. Silicon Valley Bank grew its deposits 178.5%, from $62.9 billion to $175.4 billion in the past three years, although its deposits had started to fall in the second half of 2022. Signature Bank, a crypto-focused bank in New York, experienced a 112% gain in three years.

One way to think of deposits is as a loan a customer provides the bank, and that money in turn is loaned out in two primary ways. It can be used to fund a traditional loan or lease, which is what most people associate with banks. That type of lending is what usually gets banks in trouble, as during the Great Recession. But a miniscule 0.36% of loans are delinquent in Colorado, according to the Colorado Bankers Association.

Banks can also “lend” money out to the federal government by purchasing Treasuries and other government-supported debt-like mortgage securities. Normally those investments are considered more secure than making a business or real estate loan, but when interest rates spike, even “safe” assets like U.S. Treasuries can lose significant value.

A 10-year Treasury Note yielded 0.65% during the early months of the pandemic in 2020 traded at around 3.5% Monday and before the current crisis was closer to 4%. Debt instruments carrying a very low interest rate are worth a lot less, but the losses don’t have to be realized unless a bank goes to sell some of its holdings. Essentially, they are buried in the basement until they are brought into the light of day, for what is looking more like a garage sale.

Uninsured deposits

So what might make a bank sell its securities and take a hit? The lion’s share of SVB’s deposits, about 86.4%, were uninsured by the FDIC, which was created to combat the bank runs seen during the Great Depression. The premise was simple. If customers know their money is guaranteed, they are less likely to make a pre-emptive run and remove money from a bank they perceive to be struggling.

But when so many deposits are uninsured, as was the case at SVB and Signature Bank, then customers are on their own and more inclined to run at the first sign of trouble, which is what they did.

The FDIC insures up to $250,000 on a single account, and while that may be enough for many consumers, it isn’t enough to cover commercial bank customers moving millions of dollars around a month. An estimated $6 trillion in U.S. bank deposits is uninsured, several times more than the $128 billion available to protect guaranteed deposits at the end of last year.

SVB, which focused on technology startups backed with large sums of private equity funds, was an extreme case. Fewer than 1% of U.S. banks had a higher share of uninsured deposits, although Signature Bank, the other bank regulators took over, had closer to 90% of its deposits uninsured. But if uninsured deposits start sloshing around in pursuit of safety, many banks could be put at risk.

Of the deposits held by the banks most active in Colorado, just under half, around 47%, are uninsured. For the largest banks like Wells Fargo and Chase, much of that money is held outside Colorado and banks with under $1 billion don’t have to report their uninsured deposit amount, complicating the calculation of a state number.

None of the banks studied were above SVB or Signature, although two regional commercial banks were in the neighborhood. UMB Bank, based in Kansas City, had $24.6 billion in uninsured deposits, which represented 75% of its total. BOK Financial (Bank of Oklahoma) had nearly $21.3 billion or 61.3% of its deposits uninsured.

UMB Financial CEO and president Mariner Kemper doesn’t dispute the 75% figure but said the bank primarily focuses on commercial and institutional customers, who need to hold larger amounts than what the FDIC limits will protect. The bank uses its bonds to collateralize a portion of those deposits, a type of self-insurance.

“Excluding these collateralized deposits, we estimate that approximately 57% of our deposits were uninsured, putting us more in line with our peers,” he said, adding that more than half of the bank’s customers have been banking with UMB for more than 10 years.

The federal government’s decision to cover the uninsured depositors at SVB and Signature has quelled fears and should make future runs less likely.

But beyond safety, depositors can also pull their money, insured or not, to pursue a higher rate of return elsewhere, say by a bank making a better return on its assets paying more or by a money market fund. Even if a bank doesn’t face an outright run, it can see outflows, which will force it to raise money and recognize losses in its investment holdings.

Broken bonds

Something else that sets SVB apart from most other banks was how it split its assets between loans and investments, as well as the large share of investments not marked to their current market value.  About 62% of its assets represented investments, mostly U.S. Treasuries and mortgage securities, and only 35% represented loans made to customers.

The Colorado banks are almost the inverse, with individual ratios averaging a 60% loan and 32% investment split. The remainder short of 100% reflects buildings, equipment and other kinds of assets. Signature Bank had a more typical ratio skewed toward lending, while Silvergate, a bank that decided to liquidate itself before a takeover, only had 5% of its assets in loans and 86% in investments at the end of last year.

About $7 of every $10 SVB had invested was being “held to maturity,” meaning unrecognized losses were building up as interest rates rose. Had SVB held onto its 10-year Treasury notes for the full 10 years, it could have pulled out its full initial investment and then rolled that into a higher-rate investment. Customers wouldn’t have been any the wiser.

Once forced to sell its investments to raise cash, the bank suffered a $1.8 billion loss, which it tried to plug with a $2.25 billion stock sale, something the bank’s savvy customers realized a well-funded bank shouldn’t need to do. Panic ensued, resulting in a $40 billion run on deposits in a single day and forcing the bank’s closure.

Banks of all stripes are sitting on significant losses in their investment portfolios, especially the ones that purchased longer-term debt to get a little extra yield during the period of very-low rates seen during the pandemic. But on the whole, Colorado banks hold a smaller share of investments to maturity than SVB did.