Community based institutions provide sure and steady support in the wake of larger niche bank failures
As the initial shock over recent bank failures settles, the financial services industry is taking stock of the banking practices at niche, technology-based banks and looking at what could have been done to prevent their demise. “The FDIC’s swift action to protect taxpayers’ deposits and the Federal Reserve’s new BTFP facility will reassure markets,” says Tiffani Montez, an Insider Intelligence Principal Analyst. “Still, the markets are hyper-sensitive and could react in an outsized way to any bank or startup communications around performance or balance sheet management.”
While both institutions served technology-based ventures – Silicon Valley Bank with tech startups and Signature with cryptocurrency – it was more how they did business than who they served that ultimately caused their failures. For both banks, having a high percentage of holdings concentrated in one sector led to institutional imbalance. For SVB, their proportion of liquid assets caused them to falter. “A lack of liquidity turned out to be a major problem for Silicon Valley Bank, as deposits left the bank and the value of its assets declined while interest rates rose,” according to Yahoo! Finance reporting.
Given the global nature of the economy, impacts are not limited to the U.S. or even North America, for that matter. Banks across the globe are on watch for disruption. “So far, the fallout in Canada has been minimal,” reports the Toronto Star. “On Sunday, Canada’s banking regulator took over the assets of SVB’s small Canadian arm and that afternoon, Finance Minister Chrystia Freeland issued a statement assuring Canadians (and the markets) that ‘Canada’s well-regulated banking system is sound and resilient’ with analysts pointing to the country’s big banks and how they approach widespread diversification.
As beacons for the banking industry, community banks and credit unions have stepped up to ease customer and member fears. These community-based financial institutions are emphasizing how their approach to banking is much different than the midsized, niche institutions that failed. “Over the weekend and into Monday, some publicly traded banks issued statements in hopes of easing investor sentiment that soured following Silicon Valley Bank’s demise late last week,” reports American Banker. These announcements point to their commitment to diversification and responsible risk management as core principles.
VeraBank’s president and CEO Brad Tidwell reached out directly to all of their customers via email early Monday morning – not only reassuring them about their financial soundness, but redoubling their commitment to the banking relationships they have built. “At VeraBank, we have always understood the importance of good liquidity and risk management,” says Brad Tidwell. “VeraBank is funded with stable local deposits from the communities in which we do business and not the kind of ‘hot’ and unreliable money that funded the three institutions that are now failing.”
While banking is taking a beating this week, analysts expect the industry to bounce bank. “Investor and consumer confidence in banks is being tested, along with belief in regulators’ ability to police the space,” according to Insider Intelligence reporting on the failures. “Bank collapses will rightly worry the public and raise questions around risk management practices and whether financial controls are strong enough to prevent a full-scale crisis.” As the industry wrestles with calls for additional regulatory scrutiny, the Independent Community Bankers Association points to the ways that community banks are there to provide steadiness in the storm.
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