As America watched two large banks fail over the past few weeks, we’ve seen a mad dash of businesses and individuals to ensure their money is actually safe in the bank. Perhaps what’s scariest to us all is having to confront a tough uncertainty: what does safe actually mean? Banking somewhere too big to fail? Keeping deposits under the FDIC insurance limit? Banking where a small percentage of deposits are over the limit? Learning about exotic products outside the banking system? It’s enough to make your head spin, and your wallet ache.
These unfortunate events have left community banks caught in the crossfire of a banking system struggling to save itself. Community banks generally are smaller institutions with less than $10 billion in assets, according to the Federal Reserve, that serve local community needs such as providing checking and savings accounts, home mortgages, auto and small business loans. They often have lower fees and serve a limited geographic area. Community banks typically pride themselves on their deep commitment to local businesses, home ownership, and other local finance provision. That means that they generally avoid controversial industries like fossil fuels and private prisons, focusing more on the deployment of funds to fulfill community needs.
As people fear that smaller banks may struggle in the wake of Silicon Valley Bank and Signature Bank collapses, they are often noting a preference for the big-name banks that in the past were proven too big to fail. This may provide consumers with a false sense of security, and in turn, gut community institutions that serve vital roles. So before breaking up with your local community bank, keep in mind a few critical factors:
- Community banks are less likely to fail: they are generally well-capitalized and more conservative. A St. Louis Fed study showed that, systemically, community banks are better equipped to handle both good times and bad. As Sharon Anderson, CEO of Williamstown Bank in West Virginia, commented on the SVB fallout: ”This is just another example of the disparity in size and scope. Small banks like mine manage our risk EVERY single day. When we are examined, we spend hours showing how we model and manage interest rate and liquidity risk regardless of the rate environment. We show we don’t throw all our eggs into one basket and create concentrations of risk that could harm our customers should the rate environment change. I explain how we would pivot and manage our balance sheet when rates crash overnight and how we don’t create such a mismatch in the first place… Just because a bank is ranked by Forbes or is the cool bank in Silicon Valley doesn’t mean it’s run in a way that properly manages risk. If you want to put your money into a bank online or through one of the non-bank providers, please do your research. Community banks, by nature, do not take on this level of exposure and risk. We live and work in the communities we serve, taking local deposits and making local loans while properly managing our risk so that we remain safe and sound in any environment. In WV, we have a solid regulatory system that works with banks to ensure we, as a whole, remain stable. I appreciate the level to which our regulators hold banks accountable.”
- Any bank can fail: what kind of account you maintain is what matters most. You can make sure to keep any individual bank account below $250K. This is the insured limit for both the FDIC and its Credit Union counterpart, NCUA. In practice, however, recent years have had few depositors — even the uninsured — actually losing money. According to Fed data, in the week after SVB’s collapse, community banks had over $100 billion in outflows. While that’s just 2% of their overall holdings, it’s sufficient to cause significant distress in the market. So, if you can, it’s worth it to spend a little extra effort to, for instance, split deposits among community banks if you’re concerned that you’d end up as one of the handfuls of cases where the uninsured are losing their cash. Money market accounts for larger deposits will keep you off of a bank’s core balance sheet, holding your money in relatively low-risk, liquid investments. They’re also insured by FDIC and NCUA. Money market mutual funds, however, are a different category and aren’t insured. Splitting your savings between institutions is a common and reliable way to help ensure both overall access as well as protect you from crossing any one insurance cap. Treasury bills or t-bills are another tactic to safeguard assets; though they aren’t insured, they are backed by the “full faith and credit of the United States Government,” which should mean they are likely solid bets (unless the debt ceiling showdown remains unresolved…)
- Community banks often serve as the bedrock of their communities. In a recent statement, Secretary of the Treasury Janet Yellen noted that their interest in supporting banks like Silicon Valley beyond the established FDIC limits was based on an assessment of whether “a failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.” Many read this statement to suggest that the feds would only step in to help out big banks. But the opposite could just as well be true. Operating as trust and relationship-based lending to a town or city, community banks typically serve as the economic quilt of communities; their failures would create systemic risk nationwide and thus should be included in any recovery efforts as needed.
Never heard of community banks? You might be surprised at how integrated they are into the fabric of our lives. Community banks crop up in unexpected places, like the 1946 holiday classic, It’s a Wonderful Life is about the importance of keeping community banks going for human dignity. Protagonist George Bailey comes from a family of community bankers, and, were it not for this community institution, Mr. Potter’s big bank would have the working class of Bedford Falls put up in substandard housing. Community banks often serve local entrepreneurs through trust-based lending, ensuring stronger community outcomes for all.
As Jill Castilla, President of Citizens Bank of Edmond noted, “As you watch billionaires and Wall Street analysts on various media outlets talk about the demise of the local bank, consider their interests, their investments. We are not a country of servants to the rich and powerful. We are a country of independent, hard workers that care about our communities & our neighbors. We expect companies and banks to be ethical, responsible, and accountable. Banks are no exception!” Choosing a local bank that is ethical, responsible and accountable is a good step: in general, knowing where your money spends the night is good for your conscience and peace of mind.
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