CLS Blue Sky Blog

Skadden Discusses the Impact of Banking System Turmoil

The runs on Silicon Valley Bank (SVB) and Signature Bank in March 2023 created a “very high” risk of contagion in the U.S. banking system, according to Treasury Department officials. The intervention by banking regulators, using tools approved in response to the 2008 global financial crisis, bought some time for Congress and the Biden administration to consider whether existing tools are adequate.

But the deposit outflows and resulting government-arranged takeover of First Republic Bank on May 1, 2023, have fueled continuing concerns about regional U.S. banks and have kept this issue front of mind. For now, the likelihood is quite low that new banking legislation will be enacted in the near term, but the continuing turmoil could affect the U.S. banking landscape in a number of ways.

The European banking industry has not so far been subject to the same pressures, but the U.S. problems and the failure of Credit Suisse in Switzerland are forcing a reevaluation of banking regulation and resolution processes in Europe, as well.

Here’s a high-level overview for directors of the fallout and possible regulatory responses.

Short-to-Medium-Term Concerns

Currently, the key risks to U.S. banks are:

M&A Implications: ‘Too Big To Fail’ or ‘Too Small To Survive’

Following the recent failures, the conversations in regional and community bank board rooms have turned toward assessing the need for more consolidation. The “too big to fail” theme that surrounded the 2008 financial crisis has shifted to a “too small to survive” theme, as smaller banks look for ways to achieve more scale.

Several forces could converge to produce more consolidation in the U.S. banking industry.

Depositor Protections

Depository institutions with unstable depositor bases will likely keep pressure on policymakers to expand federal deposit insurance coverage or create new types of depositor protections, such as the “targeted coverage” included in the FDIC’s “Options for Deposit Insurance Reform” that would provide “higher or unlimited” coverage for business payment accounts. However, while that might reduce or stop the destabilizing flight of uninsured deposits to larger banks considered too big to fail, or to money market funds, it remains unclear who would bear the cost. Consensus may be difficult to achieve.

Possible Role for Private Equity

In contrast to the aftermath of the 2008 financial crisis, we have not yet seen private equity investors play a significant role during the recent turmoil. However, given the need for new capital to support the banking sector, we expect that private equity will ultimately participate in a meaningful way. Some large private equity firms have said publicly that they are interested in providing capital to regional banks by buying loan assets.

However, we expect that financial sponsors will be selective in making investments and may be opportunistic in providing equity financing for M&A transactions that create larger and more diversified franchises.

Regulatory Recalibration

The Federal Reserve, in particular, will likely be under increasing pressure to respond to the supervisory deficiencies highlighted in its own review of the SVB failure. However, as the year progresses, it will become more challenging to balance tougher regulation of regional banks against the possibility that could cause them to contract lending.

Meanwhile, the FDIC resolution process may encounter greater congressional scrutiny as some policymakers question the bidders allowed to participate and the cost of rescues, asking if resolutions are conducted as fairly, openly and cost-effectively as possible.

The European Dimension

The three failures in the U.S. did not have a direct impact on banks in Europe, apart from the failure of SVB’s U.K. subsidiary. But, together with the takeover of Credit Suisse by UBS orchestrated by the Swiss government in March 2023, they have prompted a reassessment of European bank regulation.

Credit Suisse’s failure was very different from those in the U.S. It was not the result of mismanaging interest rate risk. Instead, the bank was bedeviled by a series of scandals over several years that left it in a parlous financial situation.

The implications are likely to be different in Europe. It has not seen a wave of banking consolidation because, while banking is highly concentrated in most country markets, it is fragmented across the region, with no truly pan-European institutions. And protectionist impulses tend to militate against national banking champions falling under foreign ownership.

Nonetheless, bank failures on both sides of the Atlantic have called into question the efficacy and reliability of post-financial crisis bank regulatory reforms, as well as the quality of supervision by regulatory agencies.


The turmoil in the banking system in both the U.S. and Europe seems far from over. The need for more capital and liquidity in the system, and the possibility of a recession, along with the regulatory and political response to the recent bank failures, make for a challenging environment for banks on both sides of the pond. Greater supervisory scrutiny may be directed at the selection of bank directors and the composition of bank boards, and encouraging their more active involvement in addressing unresolved supervisory concerns.

This post comes to us from Skadden, Arps, Slate, Meagher & Flom LLP. It is based on the firm’s article, “The Impact of Banking System Turmoil: What’s Next?” dated Spring 2023 and available here. 

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