QC bankers use high-risk bank failures to educate customers

Quad Citians worried about their deposits in the wake of the latest high-profile bank failures have no reason to fear for the security of the dollars they invest in their community banks, local bankers say. In addition, Joe Slavens, president and CEO of Northwest Bank & Trust Company, and Jeff Rose, president and CEO of […]

Quad Citians worried about their deposits in the wake of the latest high-profile bank failures have no reason to fear for the security of the dollars they invest in their community banks, local bankers say. In addition, Joe Slavens, president and CEO of Northwest Bank & Trust Company, and Jeff Rose, president and CEO of American Bank & Trust, say there are steps businesses and individual depositors with more $250,000 in deposits can take to ensure their money is secured by the U.S. government. “I think the banking system is strong in the United States and I think it’s also strong here in Iowa, Illinois and the Quad Cities,” Mr. Slavens told the QCBJ. “We have a lot of variety of companies and banks to pick from, so I would say on balance, our banks are as healthy or healthier than they are in other parts of the country.”

Local banks also are markedly different from those failed banks.  “We’re a little plain vanilla with respect to our lending standards versus Silicon Valley Bank (SVB), Signature Bank and some of the larger banks that specialize in high-tech and venture capital loans,” Mr. Rose said. “That’s not what we do.” For example, a major factor in the failure of SVB and Signature was that the vast majority of their deposits – nearly 94% for SVB and just under 90% for Signature – were not insured through the Federal Deposit Insurance Corporation (FDIC). When those banks suffered losses in their portfolios and nervous customers – including high-tech and bitcoin investors and venture capitalists – began buzzing about it on social media, word spread quickly. That resulted in each case in a run on the bank. Think George Bailey’s building and loan crisis in “It’s a Wonderful Life” – but on steroids. Just like the fictional Bailey Building and Loan, the recently failed banks’ money was invested elsewhere so SVB and Signature could not accommodate the massive panicked withdrawals. But unlike the financial institution in that holiday movie classic, SVB and Signature customers weren’t seeking to recover hundreds of dollars.  “Their clients were these high-tech companies that kept billions of dollars, not hundreds of thousand, not millions, but billions of dollars at the bank knowing that they were uninsured and it’s why they got nervous over Silicon Valley’s liquidity position,” Mr. Rose told the QCBJ. “Once they started pulling out it caused a run and it's tough to replace billions of dollars overnight.” Fortunately, Mr. Slavens and Mr. Rose said in interviews this week, local fallout from those failures has been negligible. “Even though we had all this havoc over the weekend with Silicon Valley and Signature, we have had no noticeable impact here in the Quad Cities,” Mr. Rose said. “In fact, I talked to my peers – presidents and CEOs across cities throughout Iowa and parts of Illinois – and nobody has had an issue whatsoever.”

Local banks are, however, seizing the moment to educate depositors – businesses, individuals and families – about how to protect their money. “It’s become a much smaller world and so things that happen far away, we are obviously more aware of them today,” Mr. Slavens said. And even when they have no direct impact on the Quad Cities, he said they “have indirect impacts on us, and it allows us to learn from what takes place in other places so that we make the best decisions.” For most individuals, Mr. Slavens stressed, their money is backed by the full faith and credit of the federal government through the FDIC, which guarantees all deposits of $250,000 or less. It is a bigger cause for concern for those “who are fortunate enough to have to deal with the complexity of having more than $250,000,” he added. If you’re in that category, Mr. Rose recommends visiting the FDIC’s Electronic Deposit Insurance Estimator (EDIE). That online tool can determine whether your accounts are fully insured at each place you bank. EDIE allows users to input dollar amounts on deposit in a bank or use a hypothetical scenario to determine their coverage.  “Community banks have a much, much significantly lower percentage of our deposits that may not be insured and what we do is that we structure our relationships to make sure that we minimize any exposure, whether its business accounts or personal accounts to make sure that if somebody is uncomfortable, we can structure it such that they have zero risk,” Mr. Rose said. The bank can help individuals do that by creating multiple accounts. For example, he said, a couple with three children can insure $3.5 million via the FDIC’s $250,000 deposit guarantee by creating separate accounts under different combinations of each of the family member's names. Businesses also can be protected, and that’s important since it’s common for commercial accounts to have more than $250,000 in the bank due to sales, payrolls and other business transactions, according to Mr. Slavens.  Both Northwest and American banks work with their customers to ensure all their deposits above the FDIC threshold are safe, sometimes in ways the depositor doesn’t even know about. But not all banks do, Mr. Slavens warned, so it's important to ask questions. Businesses, for example, should find out if their bank purchases securities from the federal government to collateralize deposits above $250,000, and if it participates in the FDIC Insurance Reciprocal Deposit Program that allows banks and customers to access multi-million-dollar FDIC protection through a single relationship. Find out if your bank uses the Certificate of Deposit Account Registry Service, Mr. Rose said. CDARS allows a business through its bank to invest in CDs held by many different FDIC-insured banking institutions, so it can achieve full FDIC coverage. Another tool is ICS – the Internal Cash Sweep – program which secures large sums by spreading the funds over other ICS Network banks. Deposits are at local banks but they get the benefit of having the insurance through another bank. Your local banker also can collateralize deposits through a security that has been issued by a U.S. government agency, for example the Treasury Department so everything after the $250,000 insured by FDIC is backed by the government, Mr. Slavens said. He also offered a three-question test to determine whether a bank is secure.

1. “What is your capital ratio if you had to take losses in your bond portfolio?” Essentially, that ratio measures a bank’s available capital as a percentage of a bank’s risk-weighted credit exposures. “If they answer over 8% on both of them, you can feel really good about that,” Mr. Slavens said.
2. How much does your bank have in uninsured deposits? Uninsured depositors like the ones at SVB “are a very, very nervous depositor base,” which can spark a run. “If they answer less than 30% you can feel good about them,” he said.
3. What’s their Texas Ratio? It’s a measure of how strong your borrowers are now. Typically, Mr. Slavens said, “most bank failures in U.S. history have come from having bad loans.” The Texas ratio asks the question: How many non-performing loans do you have as a percentage of your capital? The “watermark for a yellow flag is around 40%.”

Using those measures, Mr. Slavens said, it’s also important to note that, except for the billions of dollars in uninsured deposits at SVB, there was no reason for that bank to fail. The problem arose when very nervous depositors panicked.  “The banking system is built on trust,” he said. “It’s like a lot of things in a society built on trust. “Think about all the times we trust the guy riding in the other lane not to leave their lane or drive the wrong way on a one-way,” he added. “The banking system is the same way. … If you really felt one car accident made the roads unsafe would anybody drive?” Mr. Rose urged Quad Citians to differentiate the large high-tech and specialty banks and their local community bank “because it’s a totally different risk profile.” He also encouraged customers to “get educated on what your options are so that if ... you see an article in the paper and see something on TV that causes concern, you should be able to rest assured that you’re not at risk.” Mr. Rose also told the QCBJ that the bulk of community bank depositors in the U.S. – businesses and individuals – are unlikely to be impacted by recent high-risk bank failures. But the 5,000 or so banks across the county will. He added that’s because the burden of reimbursing the uninsured SVB and Signature depositors won’t be borne by the government or taxpayers. “We think that there’s going to be a cost and it’s going to be absorbed by the banking industry,” Mr. Rose said. “So what it means is that they’re going to assess other banks in the industry to pay for it.” He added: “Our position as community banks is that any assessment should be risk-based and those who pose the greater threat of risk should pay a higher premium than those who are not high risk. Community banks didn’t cause the problem.”