In the wake of
In the banking universe, Main Street businesses are served by industry-focused institutions, such as Silicon Valley Bank, as well as thousands of regional, community and business banks. These businesses require services that involve transaction amounts well above Federal Deposit Insurance Corp. insurance limits, often parked as deposits in-transit. The threat of interruptions to those transactions affects the risk management choices of these firms. Triggering systemic flight to safety is something that regulators and lawmakers need to consider.
This could have a disproportionate impact on the progress of minority- and women-owned businesses, which often require the "personal touch" attention of community and business banks as they seek access to needed capital. A significant portion of this economic flexibility could be lost if deposits from smaller institutions migrate to national ones.
As executives with nongovernmental organizations that work with regional, community, and business banks to customize community benefit plans for the outreach and outcome needs of underserved communities, we believe the potential loss of smaller institutions would create a vacuum in the delivery of services that could impede numerous policy goals.
It's not in the best interest of the Main Street economy for businesses to concentrate their banking in this manner. America's smaller community and business banks provide vital services supporting supply chain, manufacturing, operations and payroll transactions that depend on the more flexible relationships local banks deliver. Ensuring America's companies remain confident in their banks as they engage in depository institutions in transactions well above the FDIC deposit insurance limit is vital to the national interest. This is a confidence and stability mission focus that bank regulators need to reprioritize.
The FDIC, with support from Congress, if necessary, can largely solve this problem. The limit on FDIC and National Credit Union Administration insurance could be raised substantially. However, it is likely that Congress may not act as swiftly as necessary to shore up the confidence of uninsured depositors. And it would materially change the size of the Deposit Insurance Fund (roughly $128 billion or 1.27% of bank deposits) and the
The FDIC and other regulators should consider how they can, within the limits of safety and soundness, increase awareness of the availability and benefits of programs already allowed by existing laws and regulations.
The U.S. system of resolving bank failures did work in this case. The purchase and assumption of the deposits of Silicon Valley Bridge Bank by First Citizens BancShares, with some exceptions, in the aftermath of an internet panic driven $42 billion run on SVB's deposits, does indeed serve as a warning that tail-risk realization is a safety-and-soundness consideration deserving of regulatory scrutiny.
But these are anomaly cases and are not systemic. Regulators can help assuage public fear by pointing out that most banks do not have extreme tail-risk profiles that triggered these most recent spectacular collapses. The public deserves to be assured that the banking industry does, for the most part, operate soundly.
It is vital that regulators' actions include crisis management to stem public fear. It's possible hundreds of billions of assets will leave otherwise healthy community and regional banks and consolidate in the hands of a few banks that are already so large they pose systemic risks to not just the U.S., but global financial systems. Recent large bank earnings reports show some evidence of deposit growth in the aftermath of the crisis.
With more transparent communication, small-business owners can feel confident they can continue their relationship with banks that understand their market, needs and unique circumstances without fear that an unpredictable financial event could prevent them from making their next payroll. Public education must be delivered in the plain language of ordinary people. Assets are sticky and, once gone, may never return.
Regional and community banks also face another congressional headwinds — increased threats of a greater regulatory burden. Writing in The New York Times, Sen. Elizabeth Warren, D-Mass., said: "These threats never should have been allowed to materialize." She added: "Regulators must take a careful look under the hood at our financial institutions."
While some Americans may agree with these sentiments, punitive action by Congress at this time would not be calming to the economy.
Lawmakers and regulators must keep in mind that larger banks tend to be less harmed by added regulatory complexity due to economies of scale. Smaller banks, by contrast, must respond to added regulatory burden by diverting resources from their essential activities — working with individuals, homeowners and small businesses — which they will increasingly be unable to afford.
While these threats should never have been allowed to happen, it's not obvious that more onerous regulation is needed "to look under the hood." In the case of SVB, stricter regulation may not have made any difference. After all, it was private investors, using publicly available information, that first sounded the alarm about the potential losses in the bank's hold-to-maturity assets. Short sellers using the internet caused a panic that caused $42 billion of deposits to run in a single day. Two days later, SVB was in receivership. Neither SVB nor Signature Bank appear to have been included on the FDIC's most recent list of around 40 "problem banks." Indeed, both SVB's and Signature's financial condition in their call reports were arguably stellar, until interest rate changes created an unrealized squeeze in the net margins of their businesses.
Regulators certainly have an important role to play. But as they focus on making the banking system safer for depositors, they must acknowledge not only the vital role played by regional and community banks, but that actions leading to an even more top-heavy concentration of banking assets will ultimately lead to greater financial instability down the road.
