Experts: Bank failures unlikely to spread to community banks

Banking experts say community banks will not be significantly impacted by the recent high-profile failures of large financial institutions Silicon Valley Bank and Signature Bank. 

The New York Department of Financial Institutions closed the $110 billion Signature Bank on March 12. The New York City-based commercial bank had faced a crisis in confidence after California-based Silicon Valley Bank failed on March 10 following an unsuccessful capital raise. The $210 billion Santa Clara bank was the largest to fail since $307 billion Washington Mutual Bank went belly-up in 2008, and was the first FDIC-insured institution to be shuttered since Kansas-based Almena State Bank in October 2020. 

 Regulatory action came as other banks showed signs of weakness. Embattled San Francisco-based First Republic Bank announced on March 12 that it had improved its financial standing by securing funding from the Federal Reserve and JPMorgan Chase. Billionaire investor Bill Ackman predicted additional failures despite regulators intervening to boost the confidence of the banking system.

Community banks don’t face significant risks from those failures because their underlying financials remain strong, said Karen Grandstrand, a lawyer specializing in bank regulation and M&A for Minneapolis-based advisory firm Fredrikson & Byron.

The Federal Reserve’s decision to raise interest rates by nearly 475 basis points over the last year played a role in Silicon Valley Bank’s collapse, said Jeff Caughron, a senior partner at Oklahoma City-based securities firm The Baker Group. He said community banks have “more stable and diversified funding” than SVB. “Unlike traditional community banks, SVB had very little funding from sticky core deposits or solid legacy retail accounts,” he noted. “Instead, they relied on volatile liabilities from high-risk commercial accounts and very rate-sensitive funding.” 

Federal regulators have announced that all depositors at both Signature and Silicon Valley Bank — even those exceeding the $250,000 insurance limit — would be able to access their funds by March 13. The decision to lift the statutory risk exception came after recommendations from both the Fed and FDIC boards and in consultation with President Joe Biden, according to a March 12 press release from Treasury Department Secretary Janet Yellen, Fed Chair Jerome Powell and FDIC Chair Martin Gruenberg. 

Following Signature’s failure, the FDIC created Signature Bridge Bank, N.A., which it will run as it tries to sell the bank. The agency named former Fifth Third Bancorp President and CEO Greg Carmichael as CEO. 

The Federal Reserve has announced that it will provide easier terms on short-term loans taken by cash-strapped banks in the wake of the collapse. The $25 billion in funding will be used for loans of up to one year to banks, savings associations, credit unions and other depository institutions.

To Grandstrand, the quick response from regulators is ensuring the banking system is stable and should give community banks confidence that no significant downturn is looming. She said banks must use the incident to ensure their customers understand the importance of having FDIC-insured deposits.