The Tennessee banking industry is strong, with credit quality and capital indicators continuing to be robust. This is the message we are conveying to Congress, media, and bank customers. As questions arise from the failure of Silicon Valley Bank and Signature Bank, we continue to reinforce the soundness of traditional Tennessee banking.
With Silicon Valley Bank, there has been discussion around its bond portfolio, heavy tech concentration, and stock selloff. And there is no doubt that the bank was as poorly managed as it was regulated. However, the truth is that its demise was just an old-fashioned bank run.
Typically, the rare occurrence of a bank failure is seen coming months in advance, but SVB’s failure is different. This one brought us into a new era of banking in which social media can be as significant of a risk as cybersecurity and credit quality. If it weren’t for the concerns of a few that spread like wildfire on Twitter, the run likely would not have happened.
Around our house, we often refer to the old adage that “life is 10% what happens to you and 90% how you react to it.” And the regulatory agencies could not have reacted to SVB’s failure much worse than they did. Instead of the FDIC securing a buyer over the weekend because of concern around a large bank growing even larger, the agency instead provided a safety net for uninsured depositors. And the market response was exactly what one would expect. Banks $200 billion and above were now seen as “too big to fail” and a safe haven for depositors.
Compounding this was Treasury Secretary Janet Yellen’s statement that uninsured depositors of systemically important banks would continue to be fully covered. Although she tried to walk these comments back in the following weeks, including a vague statement suggesting all depositors would be covered in the event of any bank failure, her remarks added to the turmoil.
Some estimates suggest that the largest banks grew by as much as 15%, which is actually more growth than simply allowing one of the largest banks to acquire SVB. And yet, a number of community banks in Tennessee saw deposit growth as local banks were seen by some as safer options. Regardless, the moving of any deposits is a direct result of the poor handling of this situation in Washington.
While it is easy to lay blame for how we got here, the most important question is what happens next. There has been discussion around all bank deposits being insured, but for this to happen, there would need to be Congressional action. At this point, bipartisan leadership and the House Freedom caucus are opposed to this. The strongest supporter of unlimited deposit insurance is Senator Elizabeth Warren who no doubt would use a bill to enact additional regulation.
And then there is the question of whether we need a complete overhaul of deposit insurance. Should banks be allowed to purchase additional insurance? Should transactional accounts have unlimited insurance? These are options that need to be given serious consideration in the months ahead.
There is no lack of opinions for where we go from here. The truth is that all banks are not created equal and treating them the same does a disservice to the industry. But creating a bifurcated banking industry could ultimately lead to an unfavorable regulatory position for community banks and lead to additional consolidation. Finding a balance will be essential as we look toward the future.
In the meantime, we must acknowledge that the federal regulatory agencies have failed our system and customers by prioritizing social issues over safety and soundness and picking winners and losers when it comes to the banking industry. The Tennessee banking industry and our customers deserve better. And we will continue to advocate for a system where all banks can thrive.