JOHNSON CITY, Tenn. (WJHL) — The differences may not be as stark as night and day — Silicon Valley Bank (SVB) and community banks in Northeast Tennessee are both banks, after all — but one area bank CEO said area banks and SVB’s business models are as different as “apples and oranges.”
“I just want to reassure everybody that … the local banking community is strong and what happened with SVB and Signature Bank is very different than the local banking community here,” Bank of Tennessee CEO Will Barrett told News Channel 11 Monday.
“Silicon Valley Bank had a very strong niche, an overweighted niche from my perspective, into the tech and healthcare sector,” Barrett said.
His comments came hours after weekend actions by both the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) to protect customers of SVB and of Signature Bank, which the government took over this weekend.
“Compare and contrast the local banking, community banks, regional banks here in the region, we’re very much more diversified in terms of customer mix,” Barrett said. “There’s not an oversized exposure to any one particular sector.”
Still, any time a large bank fails suddenly, it’s natural for banking customers to wonder about their own money. Barrett said those anxieties may have been exacerbated by how rapidly news travels in the digital age and how uncharacteristic SVB’s demise was.
“Financial institutions still depend on the confidence of the depositors and the confidence of borrowers,” Barrett said. He said the closures and the prior run on the bank’s assets caught people off guard.
“If you look at a lot of the bank failures in the past, there have been underlying credit issues there that have driven banks to ultimately fail or close, but here there are no underlying credit issues that I’m aware of that precipitated a run on the bank,” he said.
Crypto and startups vs home loans and mom and pops
SVB had heavy exposure in the venture capital world and tech industry, and news has come out since Signature’s takeover that it was leaning heavily into cryptocurrency investing. Both banks had other interests, but they also had a lot of depositors with more than the standard FDIC-insured $250,000 in their accounts.
The tech sector has been struggling even as the overall economy continues adding jobs. As depositors like startup companies who held higher amounts in accounts began pulling their money, the banks didn’t have enough to cover without liquidating some of their holdings — which included heavy amounts of bonds that had lost value due to inflation.
“What caused that run on the bank was very unique to Silicon Valley Bank and not Bank of Tennessee or any other local banks,” Barrett said.
“Your local banking community is very diversified in the one to four-family mortgages, the local pharmacy, the local apartment building and it’s just apples and oranges different how we’re structured versus how some of the failed banks are.”
That kind of move could have snowballed, Barrett said.
“The Federal Reserve, the FDIC, they wanted to ensure that whatever happened there didn’t domino into the traditional banking sector, so they gave banks tools for additional liquidity and other ways to help FDIC insurance that will basically stop any bleed-over to the general banking sector.”
Barrett doesn’t expect any area banks to need those new tools. A primary tool is the opportunity to sell bonds to the Federal Reserve at the “par value” at which they were bought.
Inflation has decreased the value of bonds that were bought when interest rates were lower, and many banks hold significant portfolios of those. Non-stressed banks are getting less than they’d like to, as bond interest rates were well under 2% for years but are now closer to 4% — but they can suck it up and hold those bonds to maturity, then get the base amount.
But banks like SVB who need immediate capital would be forced to sell those bonds for about 10-15% less than their value to entice buyers to purchase a low-yielding investment.
The Federal Reserve wanted to avoid the kind of spiral that could create, so it’s letting banks use low-yielding bonds as collateral. A bank can get $100,000 for a $100,000 bond from the Fed, though it will have to pay that back with interest at some point.
Meanwhile, the Department of the Treasury, Federal Reserve and FDIC announced jointly on Sunday the government would protect all SVB and Signature depositors, both insured and uninsured (above $250,000). The move will be accomplished through a quickly created FDIC-operated “bridge bank,” Silicon Valley Bank, N.A.
Taxpayers won’t have to take on the bailout, a release said.
“Shareholders and certain unsecured debtholders will not be protected,” it read. “Senior management has also been removed. Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”
The release came just hours after the FDIC announced that some uninsured deposit amounts would be available through advanced dividends, with receivership certificates being provided to those depositors for the remaining amount of uninsured funds.
Barrett thinks SVB might have avoided its failure if the Federal Reserve had implemented the bond rule before last week’s run on the bank. But he doesn’t expect any area banks to be in a position where they need to pull the trigger on the bond opportunity.
“I don’t foresee any local or regional bank here getting into the position that Silicon Bank did … They’re just different beasts.”