Expert: Failures not a threat to community banks

United Bankers’ Bank Chief Investment Officer Ben Eskierka speaks before a crowd of approximately 250 bankers on March 31 during an ALMEdge Conference in Prior Lake, Minn.

The recent collapses of Silicon Valley Bank and Signature Bank don’t pose systemic risks to community banks, said Ben Eskierka, United Bankers’ Bank Chief Investment Officer, March 31 during an ALMEdge Conference in Prior Lake Minn., attended by more than 250 bankers virtually and in-person.   

Eskierka’s comments came three weeks after regulators closed Silicon Valley Bank on March 10. The California-based bank was the largest to fail since the $307 billion Washington Mutual in 2008. On March 12, the New York Department of Financial Institutions closed the $110 billion Signature Bank after the New York City-based commercial bank and major lender to the crypto industry faced a crisis in confidence triggered by the SVB failure. 

To Eskierka, the recent failures more closely resemble the savings and loan crisis of the 1980s than the 2007-08 financial crisis. He traced Silicon Valley Bank’s failure to management failures and the unintended consequences of interest rate hikes. During the pandemic, billions of dollars in IPOs and venture capital funding doubled Silicon Valley Bank’s balance sheet. Not accounting for the Federal Reserve’s coming interest rate hikes over the past year, SVB loaded up on mortgage-backed securities and long-term U.S. Treasury bonds.

As the tech industry shed thousands of jobs and the Federal Reserve continued to raise interest rates, Silicon Valley Bank’s deposit costs increased, pinching net interest margins. Eskierka noted the banks the Fed stress tests last year only factored in the 10-year Treasury doubling to 150 basis points from 75, far less of an increase than the Fed’s 475 basis point rise. 

 Eskierka partially attributed Silicon Valley Bank’s failure to its excess reliance on uninsured deposits and the ability of customers spooked by news of the bank’s worsening financial situation to instantly withdraw large amounts of cash from SVB. Ninety-seven percent of the bank’s liabilities were uninsured. An estimated $42 billion of deposits exited the bank’s balance sheets the day before its collapse.

Eskierka said community banks complacent with low interest rates and a lack of competition for deposits over the last 15 years still face numerous challenges, including a likely recession and the end of low funding and labor costs. Commercial deposits decreased last year for the first time since 1948 but remain far higher than before the pandemic. Customers who can now move money more efficiently are shifting their funds into accounts with additional yield opportunities, he noted.

Eskierka, who sees a recession as likely, said banks should either use the Bank-Term Funding Program or make it part of their liquidity management process. The Federal Reserve-administered emergency lending program was created following the bank failures to provide emergency liquidity to depository institutions, and can be used to fund loan opportunities for a year or access liquidity at favorable terms.