KSU economist 'optimistic' about banking sector stabilizing; local bankers unperturbed
Mar. 14—KENNESAW — A Kennesaw State University economist told businesspeople last Tuesday that he's optimistic that steps taken by the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation will stabilize the banking sector in the wake of two regional banks collapsing.
In response to the failure of California-based Silicon Valley Bank and New York-based Signature Bank, authorities announced a new instrument through which banks whose balance sheets are hobbled by high interest rates will be able to access liquidity in the form of Fed loans against their affected assets.
The Treasury Department, meanwhile, announced that customers of both banks would not lose their funds, including those who had funds exceeding the $250,000 federal insurance limit. President Joe Biden said taxpayers would not bear the costs and the money would instead come from fees that banks pay into the federal Deposit Insurance Fund. He also said the collapse of the banks would not spiral into a larger crisis, as occurred in 2008.
Those steps, Tutterow said, provide a "backstop" against what happened at Silicon Valley Bank, which he described as an "old-school bank run" where customers rush to withdraw their money in a panic.
"So, I am optimistic that for better or worse, the Fed and the FDIC backstop will provide some comfort in the banking sector," said Tutterow, speaking to the Kennesaw Business Association.
Tutterow said that banks like SVB invested heavily in longer-term bonds when interest rates were low. But then the Fed began raising interest rates to combat inflation, which lowered the value of the bonds. But to combat inflation, the Fed raised interest rates several times over the past year, lowering the value of the bonds.
"If everybody wants their deposits at the same time, they got to sell some of those assets," Tutterow said.
So, during the bank run on SVB, the bank was forced to sell its bonds at a loss.
On March 10, after a day in which SVB customers tried to withdraw $42 billion in deposits, the FDIC seized control of the bank. Over the following weekend, regulators shuttered Signature Bank after determining that it, too, presented a systemic risk to the banking system.
One audience member asked Tutterow if he expected more interest rate hikes, in light of the recent bank collapses.
Tutterow said he thinks the hikes will continue.
"The real problem here is not that the Fed raised rates too quickly last year," he said. "The real problem is that we created all kinds of distortions by having interest rates of zero from seven years, from 2008 to 2015, and another two years, from 2020 to 2022 ... I think we're paying the piper for rates being too low, too long."
Another factor in the rapid collapse of SVB, Tutterow said, was technology.
People can, with a few taps on their smartphone, move money between accounts.
"And so bank runs can be much quicker than they used to be," he said.
Local bankers unperturbed
Tutterow said one concern about the government's actions in recent days is that it could create a "moral hazard."
"Which says, 'If I know that you're going to bail me out over and over again, then I don't have any incentive to be more cautious in the things that I do,'" he said.
Ron King is the Cobb County market president for Tallahassee, Florida-based Capital City Bank. King told the MDJ his bank doesn't play fast and loose with customers' money, and manages its risks.
"We're not, outside of the market turmoil, not anticipating any issues whatsoever. ... We've been around since 1895 ... And we're just a well-diversified, well-capitalized, conservative institution," King said.
People with money in local and regional banks should not be concerned about their deposits, King said, because SVB and Signature were niche banks. SVB was known for its involvement in West Coast startups, and Signature was known for its involvement with cryptocurrency.
"I think they were such unique, niche banks in what they did, that had pretty high risk profiles, that are traditionally very different than what you would consider your smaller community banks," King said of SVB and Signature.
Regional bank stocks were down 7.7% early last week to their lowest level since June 2020, the Los Angeles Times reported.
Bank stocks recovered, however, as fears of a wider crisis appeared to ease.
King said investors shouldn't lump all regional and local banks together — SVB made a bad bet, but others have been more conservative.
"As a bank, we are flush with the deposits, we are good there. ... We're continuing to lend, we have a good loan-to-deposit ratio ... like I said, we're business as usual," King said.
Columbus-based Synovus Bank, meanwhile said that "we have a strong balance sheet with good liquidity and capital strength," reads the statement. "And our deposit base is growing and diverse," the Columbus Ledger-Enquirer reported.
Ryan Earnest, CEO of northwest Georgia-based First National Community Bank, told the MDJ that his bank was also operating business-as-usual.
"I am pleased to convey that the bank is supported by strong capital and liquidity positions earned by executing safe and sound business models with focus on risk management practices that will serve our customers and communities well into the future," Earnest said.
Earnest added that the steps taken by the federal government and regulators were reassuring.
"The matters over the weekend appear to be related to unique situations which should not represent a spillover into the industry as a whole," Earnest said.