Main Street banks shouldn’t pay for Silicon Valley speculation

The recent closure of two large financial institutions that serve higher-risk industries, such as the cryptocurrency sector, has raised questions from many depositors while eliciting a range of reactions from policymakers. No doubt calls for stricter controls and regulations will come from Washington. 

However, to ensure the nation responds appropriately to these developments, depositors and policymakers must distinguish these large, risky banks from the community banks that serve local consumers and small businesses.

The profiles of the financial institutions recently closed by regulators illustrate why they were at particular risk. These institutions were unlike many other banks, and absolutely nothing like the local community banks that small businesses across the country depend on for capital. 

Silicon Valley Bank (SVB), a large bank in Santa Clara, California, had $209 billion in assets as of Dec. 31 and was the 16th largest bank in the country at the time of its closure on March 10. Fueled by booming tech companies during the COVID-19 pandemic, SVB experienced rapid asset growth of more than 200 percent between year-end 2019 and 2022.

Responding to this rush of cash, the bank reportedly funneled that deposit surge into Treasury bonds and mortgage-backed securities, which lost value when the Federal Reserve suddenly and dramatically began raising interest rates to combat inflation. Lacking adequate hedges when things went south, this approach weakened the bank’s finances and, when it began selling assets for a loss, caused a panic. 

In short, this large bank fueled its own boom-and-bust cycle through a large number of uninsured deposits and an over-concentrated balance sheet.

Signature Bank of New York, a $110-billion-asset institution that was closed by regulators on March 12, was also heavily concentrated, this time in deposits from cryptocurrency firms. Many Signature depositors, spooked by the closure of SVB, quickly began withdrawing their funds.

In both cases, regulators responded quickly by closing the banks to ensure their depositors are made whole via the Federal Deposit Insurance Corporation (FDIC), which was specifically created to address circumstances like these. The FDIC’s Deposit Insurance Fund — which keeps deposits insured and is funded by the nation’s banks — has a record-high balance, meaning depositor funds are safe and protected. 

While depositors are well-protected, these recent developments illustrate the risks of large financial institutions over-concentrating their activities in certain industries, which can lead to losses as the economic environment changes. By contrast, community banks operate under an entirely different business model.

The community bank model, which represents the vast majority of the nation’s insured banks, is focused on one-on-one relationships with consumers and small businesses in the cities and towns they call home. As small businesses themselves, community banks know their customers, reinvest in the local communities in which they are based, and are dedicated to their customers over the long haul.

This long-term outlook ensures a tight focus on established banking practices that promote safety and soundness over generations. As reported in the FDIC’s latest quarterly banking profile, community banks’ asset quality is favorable, total deposits are stable and capital ratios remain strong. 

As proven during both the Wall Street financial crisis and the COVID-19 pandemic, Main Street community banks are there for their customers during uncertain times and have proven to be resilient through economic cycles over the decades. 

Given these vastly different banking models, Washington should ensure any response to the closures at SVB and Signature Bank does not affect the community banks that continue to do right by their customers and hometowns.

First, community banks should not bear financial responsibility for large bank speculators. They should be exempt from restoring any potential losses to the Deposit Insurance Fund through a special assessment. 

And while Wall Street and Silicon Valley venture capitalists might require closer scrutiny of their operations given these developments, Main Street community banks should not face new regulatory burdens from Washington. Small lenders shouldn’t have to pay for the mistakes of banks that are orders of magnitude larger with markedly different risk profiles.

Community banks have long supported tiered regulations for different financial institutions. Rules that understand and account for small and large bank business models work best. Given the continued safety and soundness of community banks, Washington should ensure any policy response supports the community banks that safeguard local communities from the risky practices of other financial institutions.

The failure of SVB and Signature Bank presents an opportunity for community bankers. They are ready, willing and able to answer questions about the latest developments at larger financial institutions. When depositors ask whether they could be exposed to the risk and mismanagement that took these two firms down, the resounding answer from community banks is no. 

Rebeca Romero Rainey is president and CEO of the Independent Community Bankers of America.