of recent closure of two large financial institutions serving high-risk industries such as cryptocurrency sector, raised questions from many depositors, while eliciting mixed reactions from policy makers. There is no doubt that calls for tighter controls and regulations will come from Washington.
However, in order to ensure that the country is adequately prepared for these developments, depositors and policy makers should ensure that these high-risk large banks and the communities that serve local consumers and small businesses must be distinguished from banks.
Profiles of financial institutions recently closed by regulators show why they were exposed to certain risks. These institutions are unlike many other banks, and quite unlike the local community banks that small businesses across the country rely on for their capital.
Silicon Valley Bank (SVB), a major bank in Santa Clara, California, had $209 billion in assets as of December 31, making it the 16th largest bank in the United States when it was founded. close March 10. SVB experienced rapid asset growth of over 200% by the end of the year, fueled by technology companies that were booming during the COVID-19 pandemic. 2019 and 2022.
In response to this cash surge, the bank reportedly poured into its deposit surge. Government bonds and mortgage-backed securities, lost its value when the Federal Reserve suddenly and dramatically started raising interest rates to fight inflation. Lacking proper hedging when things went wrong, this approach undermined the bank’s finances and caused panic when it began selling assets due to losses.
In short, the big bank fueled its own boom and bust cycles through its large number of uninsured deposits and overly concentrated balance sheets.
Signature Bank of New York was a financial institution with assets of $110 billion. closed What the regulator announced on March 12 was also very concentrated, this time with cryptocurrency companySurprised by SVB’s closure, many signatory depositors began withdrawing their funds immediately.
In both cases, regulators responded quickly by closing banks and ensuring that depositors were fully protected through the Federal Deposit Insurance Corporation (FDIC), which was created specifically to deal with such situations. I made it The FDIC’s Deposit Insurance Fund – which insures deposits and is funded by the nation’s banks – hits a record high. balancemeans that the depositor’s funds are safe and protected.
While depositors are well protected, these recent developments present risks for large financial institutions to over-focus their activities in certain industries, which could lead to losses as the economic environment changes. I’m here. Community banks, by contrast, operate on a completely different business model.
community bank model representing Majority One of the country’s insured banks focuses on one-to-one relationships with consumers and small businesses in the cities and towns consumers call home. As small businesses, community banks know their customers, reinvest in the communities they are based in, and are dedicated to them for the long term.
This long-term outlook allows us to focus on established banking practices that promote safety and soundness for generations. As reported in the FDIC’s latest report quarterly bank profilethe community bank’s asset quality is good, total deposits are stable, and capital adequacy ratios remain strong.
As evidenced by both the Wall Street financial crisis and the COVID-19 pandemic, Main Street community banks are there for their customers in uncertain times and resilient through decades of economic cycles. have proved
Given these vastly different banking models, Washington needs to ensure that its response to the closure of SVB and signatory banks does not affect community banks that continue to do what is right by their customers and their hometowns.
First, community banks should not be financially responsible to big bank speculators. They should be exempt from recovering potential losses to the deposit insurance fund through special valuations.
Venture capitalists on Wall Street and Silicon Valley may need closer scrutiny given these developments, but Main Street community banks should face new regulatory burdens from Washington. not. Smaller lenders don’t have to pay for an order of magnitude bank mistake with a markedly different risk profile.
Community banks have long advocated phased regulation of various financial institutions. Rules that understand and explain the business models of small and large banks are most effective. Given the continued safety and health of community banks, Washington should ensure policy responses that support community banks in protecting local communities from the unsafe practices of other financial institutions.
Failures of SVB and undersigned banks present opportunities for community bankers. They are ready and happy to answer questions about the latest developments in large financial institutions. When a depositor asks if these he could be exposed to the risks and mismanagement that caused the two banks to fail, Community Bank’s clear answer is no.
Rebeca Romero Rainey is President and CEO of Independent Community Bankers of America.
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