Specialist
Former executive at Pacific Western Bank
Agenda
- Pacific Western Bank’s (PacWest; NASDAQ: PACW) operating environment, discussing the VC landscape’s recent reactions
- Federal funding stifling regional bank run concerns
- Expectations for industry consolidation
- Outlook for Pacific Western navigating the current bank crisis
Questions
1.
A lot has happened in the last 4-5 days in the regional banking space. Can you guide us through the events that led up to Silvergate, Silicon Valley Bank and Signature Bank’s recent closures? Was any of it expected, and who’s to blame?
2.
What implications do you think the downfall of SVB will have on PacWest, and should we be expecting any specific changes to be made internally?
3.
You brought up whether Signature had a lot of exposure to crypto – it was a rather minute part of its brand offering and services – but it was the mere association with crypto that led to a heightened level of concern and the eventual run on the deposits. In a previous Interview [see Pacific Western Bank – Deposits Performance, Venture Tech Lending & Growth Prospects – 15 December 2022], you mentioned that you didn’t see any perceived threat or risk to the bank’s credit quality. Is its mere association with VC-backed or tech depositors enough to put PacWest in that same boat as SVB, Signature and others by association?
4.
SVB, as you mentioned, didn’t have a Chief Risk Officer for 8-12 months while the VC ecosystem was spiralling, which wasn’t necessarily well-reported. What level of elevated importance might solid corporate governance play in the health of regional banks moving forwards? How would you grade the quality of PacWest’s current risk management team?
5.
Does PacWest have the scale, relationships and trust to withstand a group of depositors potentially saying, “I actually don’t trust that my money’s here, not because I don’t trust the bank, just because I don’t trust the psychology of other people banking with the bank”?
6.
A significant factor of what’s perhaps quelled some panic or concern was that the Fed announced it would be able to cover 100% of the uninsured deposits at the two recently closed institutions. It seems that if that wasn’t the case, we likely would have seen similar runs at similar banks that deposit with customers with similar deposit betas or risk. On the one hand, this action quelled the panic, but on the other hand, it may set a dangerous precedent. What’s your take? When the federal government says, “Everything’s guaranteed, everything’s insured”, what’s to stop every bank manager from playing a risky strategy in support of shareholder returns?
7.
SVB’s inability to cover losses in deposits, prompting the need to free up liquidity, was caused by a decreased rate of deposit growth, or even more deposit outflows in some cases, as a result of both the cash crunch from the tech firms or start-ups that bank there and a general shore-up in VC financing over the last year. What makes PacWest immune to those trends in the tech and VC space, and can you comment on whether you were seeing any substantial slowdown in deposit growth, given the backdrop of the bank’s tech or VC banking group is not the largest, relative to the rest of the bank?
8.
It seems as if you were positioning the closures of SVB and Silvergate and the fate of depositors, the outflows that need to go somewhere, as potentially a win for PacWest. Is that fair?
9.
We expected to hear a verdict on the SVB bank dissection or buyout by late Sunday 12 March 2023, and it’s now Wednesday 15 March 2023 and we haven’t yet – many are speculating this silence speaks to the fact that there’s more we weren’t aware of and that regulatory reviews are taking a deeper dive. How might more news on SVB potentially trigger more concern for the space? Are you potentially concerned about this?
10.
You mentioned an unspoken social agreement between VCs and banks – “If you work with us, we’ll work with you”. How may recent events have impaired the relationship between banks and VCs moving forwards? How will banks, and PacWest specifically, view heavily VC-backed deposits differently now?
11.
In what situation do you think we should start being concerned about PacWest?
12.
Beyond PacWest, the factors you mentioned may cause harm across various banks, and many analysts are trying to rate the actual health of the regional banking landscape. How would you build a framework to determine similar portfolio risk across the regional bank landscape? What main variables would you use to triangulate what players might be most or least at risk of facing SVB’s fate? How can this rubric be applied to the rest of the sector, beyond PacWest?
13.
We did see a rebound in regional bank stocks on 14 March 2023, although it has since shifted a little bit more south. What’s your outlook for contagion? How long do you see this as lasting, and how far might it reach?
