Is the collapse of the Silicon Valley Bank a harbinger for North Dakota?
According to news reports, the Silicon Valley Bank that collapsed in the last 48 hours had similar ratios as the Bank of North Dakota. Legislators need to ensure there is a plan to prevent problems.
(Note: this article is not meant to declare that there is a problem at the Bank of North Dakota, it is just to point out and reiterate the need for more scrutiny in light of current breaking news events nationally.)
Those who have been following national financial news coverage today know that the big story is the collapse of the Silicon Valley Bank.
According to the Associated Press quote: “The bank had $209 billion in assets and $175.4 billion in deposits as the time of failure, the FDIC said in a statement…Silicon Valley Bank on Thursday announced plans to raise up to $1.75 billion in order to strengthen its capital position amid concerns about higher interest rates and the economy. Shares of SVB Financial Group plunged 60% Thursday, and rocketed lower again Friday before the open of the Nasdaq where it is traded.”
Because deposits at a bank are actually liabilities (money they owe to the depositors) and assets are the loans and debt lent out that will generate revenue for the bank, the Asset to Deposit Ration is one of the key metrics for a bank.
$175 billion divided by $209 billion is 83.7%.
Back on February 16th, I pointed out a possible concern at the Bank of North Dakota regarding its status, and the way the legislature is using the bank to creatively finance projects to keep them off the state general fund ledger.
In that article, I cited the Bank of North Dakota’s own slideshow which showed its Assets at $10 billion and its total deposits at $8.6 billion. (That equates to a 86% ratio vs. the Silicon Valley Bank ratio of 83.7%.) This means the Bank of North Dakota is running tighter than the Silicon Valley Bank that just collapsed.
The Silicon Valley Bank’s attempt to raise just $1.75 billion in liquidity triggered the domino effect leading to its collapse. That Bank is 20x larger than the Bank of North Dakota. Proportionally, this would be equal to a $90 million liquidity crunch for the Bank of North Dakota. Which explains why the Bank of North Dakota is asking the legislature to take certain loans off their books - such as the $41 million WAWS refinance.
As I said in that article: There is no problem, as long as nothing goes wrong.”
Fortune Magazine also has an article up today addressing the Industry-wide concerns with banks that operate as Venture Capital Finance banks - which the Bank of North Dakota is as well.
Martin Gruenberg could not have picked a more prescient time to flag risks in the U.S. banking industry.
On Monday, the chairman of the Federal Deposit Insurance Corporation (FDIC)—the agency that backstops depositors—addressed risks U.S. lenders faced three years after the outbreak of the pandemic. Chief among them was the potential for a bank run.
The industry had become vulnerable after the 4.5% interest rate hike the Federal Reserve began this time last year blew open a potential $620 billion hole in the sector’s collective balance sheet, as the value of banks’ bond holdings tumbled, according to the FDIC.
Gruenberg warned these unrealized losses “weaken a bank’s ability to meet unexpected liquidity needs,” and cautioned that mapping out a strategy to fund themselves profitably would prove a “complex and challenging task” in an environment where interest rates changed so radically over the past 12 months.
“Meaningful deposit outflows have not yet materialized, but banks will need to watch these trends carefully as the interest rate environment evolves,” he told a financial lobby group.
Context For North Dakota’s Economy
Silicon Valley Bank’s investment portfolio was highly specialized in the tech sector.
North Dakota’s is highly dependent on oil and ag.
Just this week, Governor Doug Burgum held a press conference and released data highlighting North Dakota’s dependence on the oil and gas industry.
The oil and gas industry in North Dakota remains a powerhouse for the state’s economy, accounting for more than $42.6 billion in gross business volume, nearly 50,000 jobs and $3.8 billion in state and local tax revenues in 2021, according to two studies highlighted today by Gov. Doug Burgum, researchers from North Dakota State University and industry officials.
“The oil and natural gas industry continues to be a game-changer for North Dakota,” Burgum said. “Taxes and royalties paid by the industry support our state’s significant investments in infrastructure, schools, communities, tax relief and the Legacy Fund, among other areas. The industry’s resiliency in the face of challenges such as the pandemic, extreme weather, volatile prices and misguided federal policies, demonstrates that it will continue to play a critically important role in North Dakota’s economy for generations to come.”
North Dakota State University researchers Dean Bangsund and Nancy Hodur studied the economic contribution of oil and gas exploration, extraction, transportation, processing and capital investments to the state in 2021, the most recent data available. Similar studies have been conducted every two years since 2005.
Their findings show North Dakota’s oil and gas industry directly employed 14,200 people in 2021, while economic activity from the indirect and induced effects of the industry supported an additional 35,185 jobs, for a total of 49,385 jobs attributed to the industry. Employment compensation, which includes wages, salaries and employee benefits, was estimated at $3.9 billion.
Total gross business volume, which includes direct sales in the oil and gas industry and business generated from indirect and induced economic activity throughout North Dakota, was estimated at $42.58 billion – an increase of $2.38 billion over 2019 and over 30% of the state’s overall gross business volume.
To put this into perspective, we can look at the data regarding the entire GDP of the State of North Dakota:
The North Dakota GDP in 2021 according to the Federal Reserve was $63 billion.
On an inflation-adjusted basis in 2012 dollars, according to the Federal Reserve, the GDP of North Dakota was down since 2014.
Again, there isn’t a problem until there is
None of this is to say the Bank of North Dakota is in trouble. But, there sure certainly be more scrutiny on the situation, and an evaluation of how the Bank of North Dakota is being used by the legislature.
When these problems do happen, they literally happen overnight - as is shown by the Silicon Valley Bank collapse.
This discussion may also tie in with the conversation about “de-risking” when it comes to pension reform.
Taxpayers can’t afford more surprise bailouts. North Dakota skipped most of the troubles of the 2008 economic collapse - let’s do what we can to avoid problems in the future.