How have bank failures have affected Arizona? What to know, and what could happen next

Three major bank failures so far this year have rattled investors, sowed confusion among the public and sparked calls for changing the way deposits are insured.

But problems at Silicon Valley Bank, Signature Bank and, most recently, First Republic Bank haven’t spilled over into the larger economy yet. And they haven't yet had much direct impact on most Arizonans, though Phoenix-based Western Alliance Bancorporation also is caught up in the turmoil.

Much of the nervousness is focused around banks with relatively high proportions of uninsured deposits and skittish customers prone to pulling out their money quickly, inciting a run on deposits. That anxiety flared up again this week, and if the economy slows in the months ahead, that could put more pressure on banks and their loan customers.

Here are answers to some questions about what's going on and how it has affected Arizona.

How has Arizona felt the impact of bank failures?

Silicon Valley Bank operated and still has a non-branch office in Tempe housing information-technology and other functions. But none of the three recently failed institutions were listed among the 67 banks with branches in Arizona as of mid-2022, the latest report on statewide deposits from the FDIC. San Francisco-based First Republic, incidentally, wasn’t affiliated with Republic Bank of Arizona, a small firm headquartered in the state.

Phoenix-based Western Alliance Bancorporation has gotten caught in the turmoil, however. The company's stock has lost roughly three-quarters of its value following the Silicon Valley and Signature failures and amid concern that other banks could be in trouble. Western Alliance also has a relatively high share of uninsured deposits. Recent media reports, denied by the company, claim Western Alliance might sell all or parts of its business.

Of the 67 banks holding deposits and operating branches in Arizona, four big ones dominate — J.P. Morgan Chase, Wells Fargo, Bank of Arizona and Western Alliance. Combined, those four held nearly 75% of all Arizona deposits and ran nearly 500 of the 1,030 branches here. Most banks operating in Arizona, especially the larger ones, are headquartered in other states.

Is Arizona’s banking sector expanding?

Not really, reflecting consolidation in the banking industry generally. While deposits, loans and other measures have increased with population gains and growth in the Arizona economy, fewer banks operate here than in years past. That’s also true nationally, with the FDIC at the end of 2022 counting about 4,800 banks nationally in its deposit-insurance system (which includes nearly all banks), down from around 7,100 in 2012 and 8,300 in 2008.

Two small Arizona-based institutions, the parents of Commerce Bank of Arizona and Bank 34, recently announced plans to merge, continuing the consolidation trend. They accounted for a slim 0.26% of statewide deposits as of the mid-2022 FDIC market-share report.

Is the banking system in general getting riskier?

That’s difficult to say for sure, but if the economy continues to weaken, it will put more pressure on banks and many of their loan customers. One possible area of concern involves office buildings, which have struggled to stay fully occupied.

“Work-from-home policies have continued since the pandemic as employees now opt for remote work by choice rather than necessity,” said Adam Turnquist of LPL Financial. “This structural shift has reduced demand for office space and pushed vacancy rates to record highs.”

Moody's Investors Service, a credit-rating agency, last month downgraded 11 regional banks including Western Alliance, U.S. Bancorp and Zions Bancorp, which owns National Bank of Arizona.

Why are uninsured deposits now an issue?

Uninsured deposits have seen "extraordinary growth" of late," the Federal Deposit Insurance Corp. said in a recent report. To keep the problems with Silicon Valley and Signature from spreading, federal regulators decided to extend deposit guarantees to all of their customers, including those above the $250,000 per-account limit.

The First Republic situation was different in that regulators arranged for J.P. Morgan Chase to buy most of the bank's assets and assume a good chunk of its liabilities, limiting the impact. Still, the FDIC deposit-insurance fund could take a $13 billion hit — more than the $2.5 billion for Signature but less than the $20 billion damage from Silicon Valley.

"With JPM’s deal assuming all of First Republic Bank’s deposits, all depositors have been made whole once again, and unlike the failures at Silicon Valley Bank and Signature Bank, the regulators did not need to extend special protection to uninsured depositors," said DBRS Morningstar, a credit-rating company, in an analysis.

Are bank failures happening more frequently?

A bit so, yes. The three bank failures this year compare to none in 2021 or 2022, though they are still well below the recent peak of 157 collapses in 2010, coming out of the Great Recession. More notable, however, is that the three failures this year were large ones.

Various other bank-industry stability metrics were improving such as the percentage of profitable banks (94% at the end of 2022) and fewer noncurrent or problem loans (just 0.73% of all loans).

Simeon Hyman, global investment strategist at ProShares, doesn't anticipate a "cascade of failures" nor a dramatic economic slowdown, but he also expects the rising cost of deposits, due to recent interest-rate increases, will mute bank profitability.

How do depositors feel about the recent failures?

Most people are taking it in stride. Just 10% of depositors said they had withdrawn more cash than normal in the wake of the failures, and just 4% said they left a bank for another institution perceived to be safer, according to a late-March poll by market research company Ipsos.

In an April survey by J.D. Power, just 29% of bank customers described themselves as “very concerned” about the stability of the banking system and even fewer, 19%, were concerned about their own banks. The latter finding indicates “most customers view bank stability as someone else’s problem,” J.D. Power said in its report.

Many customers don’t change banks often, as doing so can be a hassle. Many people have numerous ties — savings and checking accounts, perhaps credit cards and a car loan or mortgage, maybe even mutual funds or other investments — at their banks.

Only 17% of the J.D. Power respondents said they were very likely to sever ties with their current bank for a new one. Whether most of these people follow through with such plans remains to be seen.

How solid is the FDIC insurance fund for deposits?

It was improving, though the fund will incur losses for the failures of Silicon Valley, Signature and First Republic. As of mid-April, before the May 1 failure of First Republic, FDIC Chairman Martin Gruenberg said the losses for the deposit fund from the first two problem banks were not expected to have a “material effect” on the agency’s goal of reaching a 1.35% insurance funding status by 2028. At the end of 2022, the insurance fund had enough reserves to cover 1.28% of deposits.

The recent bank failures have sparked debate on how much insurance depositors should receive. Proposals range from maintaining the current $250,000 maximum per account to offering unlimited protection. Other proposals would allot higher coverage for businesses that must meet payroll and make other large-dollar transactions and thus often hold more than $250,000. Most consumers don't have anywhere near that much on deposit. In fact, 99% of bank accounts hold less than $250,000, the FDIC reported.

What has happened in the banking sector, in short?

Silicon Valley Bank, a financial institution that catered to entrepreneurs and venture-capital companies — and a bank that was highly profitable — started to get in trouble when the technology sector slowed last year. The bank had a high proportion of uninsured deposits — balances above the $250,000 FDIC coverage limit per account. With so many customers tied to their accounts electronically, it was easy for them to pull out money en masse with a few clicks on their cell phones. When rumors circulated about the bank's stability, it sparked a digital run on deposits.

Signature and First Republic, also with high proportions of uninsured deposits, were similarly exposed.

Do consumers understand banking risks?

In some ways, no. In addition to the common perception cited in the J.D. Power survey that people tend to view their own banks as safer — accurately or not — many consumers also seem to think larger banks are riskier than smaller ones. That’s not necessarily true, either. For example, large banks on average have less exposure to commercial office-building loans, as a percentage of their total loans, than smaller ones, Turquist noted.

“Customers of large, national banks express a relatively high level of concern compared to customers of smaller banks and credit unions, "even though those banks are actually more protected,” according to J.D. Power.

Reach the writer at russ.wiles@arizonarepublic.com.

This article originally appeared on Arizona Republic: Is Arizona's banking landscape threatened by recent failures?