Bank Notes

Banking 101: Paying Attention to Ratios and Why It Matters

May 29, 2024

By: Angela L. Beblo

Ratios. Percentages. Ranges. In banking, metrics matter. Too much liquidity? Too little liquidity? Increasing number of accounts more than 30 days past due? Increasing number of defaults? Too few new deposit accounts? Too small of a gap in interest rates? A small change in any one of the metrics measuring a bank’s performance can be the first indicator of a potential issue that could later turn into a significant problem if not corrected. A recent spate of bank failures highlights why hyper-focused attention on metrics is critically important in today’s financial industry.

On Friday, April 26, 2024, the first bank failure of the year occurred: Republic First Bank was closed by Pennsylvania state regulators.[1] The bank had $6 billion in assets and $4 billion in deposits earlier this year.[2] Yet, despite significant deposits, a look at the numbers available from Federal Deposit Insurance Corporation reports show a troubling picture. Net operating income for 2023 was - $40,905,000.00.[3] Total liabilities were nearly equal to total assets.[4] Signs of trouble, however, existed long before the closure occurred. “Before the seizure, Republic First was delisted by Nasdaq in August, after the bank failed to file its fiscal year 2022 report with the Securities and Exchange Commission.”[5] This was after an auditor in 2022 informed that bank of its weaknesses with internal financial controls.

On March 10, 2023, Silicon Valley Bank was closed. The collapse of Silicon Valley Bank, a bank focused on tech start-ups, happened on an extremely accelerated pace – it went from solvent to broke in just two days.[6] Part of the issues “was the failure of the bank’s executives to manage the maturity and liquidity risks that are basic to the business of banking: they failed Money and Banking 101.”[7] As early as 2022, the bank disclosed that its “weighted-average duration of its fixed-income portfolio was 5.6 years.”[8] Most of the bank’s deposits were large and uninsured, leading to significant liabilities on its balance sheet and, thus, it was vulnerable to withdrawals and bank runs.[9] Yet, more than half of the bank’s assets were held in long-term, 10+ year US Treasurys and mortgage-backed securities.[10] Because the ratios were so incredibly skewed, the run on the bank lead to what is arguable the fastest, most spectacular bank failure in more than 15 years.

Similarly, Signature Bank, was closed just days after Silicon Valley bank when “customers swiftly withdrew their deposits” after the bank announced its was limiting crypto balances in an attempt to become more diversified.[11] One of the few banks to accept crypto deposits, the bank had been attempting to move away from real estate lending that had historically been the bank’s focus.[12] Its attempt to lessen the risk of its focus on real estate lending, however, lead it to move into higher risk areas like crypto deposits.[13]

Given the speed at which the financial world moves due to technology, ratios, analysis, and assessments play even more critical roles in today’s banking world. Even the slightest change can indicate a potential issue. Investigation of those changes could allow a bank to take preventative action to prevent issues in the future.

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[1] https://www.cnn.com/2024/04/26/business/regulators-seize-republic-first-bancorp/index.html

[2] Id.

[3] https://banks.data.fdic.gov/bankfind-suite/FinancialReporting/details/27332?establishedEndRange=5%2F10%2F2024&establishedStartRange=01%2F01%2F1792&inactiveEndRange=5%2F10%2F2024&inactiveStartRange=01%2F01%2F1970&incomeBasis=YTD&institutionType=banks&limitEstablishedDate=false&limitInactiveDate=false&reportPeriod=20231231&reportType=income-and-expense&unitType=%24

[4] https://banks.data.fdic.gov/bankfind-suite/FinancialReporting/details/27332?establishedEndRange=5%2F10%2F2024&establishedStartRange=01%2F01%2F1792&inactiveEndRange=5%2F10%2F2024&inactiveStartRange=01%2F01%2F1970&incomeBasis=YTD&institutionType=banks&limitEstablishedDate=false&limitInactiveDate=false&reportPeriod=20231231&reportType=assets-liabilities-and-capital&unitType=%24

[5] https://www.forbes.com/sites/tylerroush/2024/04/27/heres-what-led-to-republic-firsts-collapse-and-why-its-different-from-2023-failures/?sh=741611215878

[6] https://www.law.uw.edu/news-events/news/2023/svb-collapse

[7] https://www.moneyandbanking.com/commentary/2023/3/20/the-extraordinary-failures-exposed-by-silicon-valley-banks-collapse

[8] Id.

[9] Id.

[10] Id.

[11] https://www.forbes.com/sites/brianbushard/2023/03/13/what-happened-to-signature-bank-the-latest-bank-failure-marks-third-largest-in-history/?sh=4581412390ff

[12] https://www.wsj.com/articles/signature-bank-raised-its-crypto-exposure-after-slowing-real-estate-lending-ce943203

[13] Id.