Common-sense community banks distinct from Silicon Valley speculators

The financial sector has been under intense scrutiny after the failure of two large financial institutions specializing in high-risk industries, such as cryptocurrency.

Some depositors in local communities might be wondering what this means for their hard-earned money. Consumers — and policymakers in Washington — must distinguish between community banks and these large banks with a much different business model and risk profile.

The financial institutions recently closed by regulators were nothing like the local community banks that invest in their local communities and help the nation’s consumers and small businesses. Before its closure on March 10, Silicon Valley Bank (SVB) was the 16th largest bank in the nation with $213 billion in assets.

Much of this growth was accelerated by tech companies flush with cash - as these funds dried up, other depositors quickly began withdrawing their funds amid concerns about the bank’s liquidity. It was a boom-and-bust cycle fueled by SVB’s heavy concentration in a single sector of the market.

Signature Bank of New York failed just two days later and also suffered from a concentrated balance sheet. Fueled by the SVB panic, depositors quickly began to withdraw their funds. Regulators closed the institution to prevent additional bank runs and to ensure the Federal Deposit Insurance Corporation (FDIC) would be able to make depositors whole.

The Deposit Insurance Fund, which the FDIC uses to insure deposits, has a record high balance. Americans do not have to worry about the safety of their deposits. That is especially true for customers of community banks.

Community financial institutions’ unique and successful time-tested model is followed by small banks in communities all across the country. Community banks promote one-on-one, face-to-face relationships with the small businesses and local residents. Community banks know what small businesses need because one can consider us a small business.

Because local financial institutions rely on relationships and reputation, they are dedicated to looking out for their customers’ long-term interests.

This outlook means they focus on established banking practices that have served communities for generations. As the FDIC’s latest quarterly banking profile attests; community banks’ asset quality is favorable, total deposits are stable, and capital ratios remain strong.

This is not the first time community banks have weathered a financial crisis. They proved stable during the 2008 Wall Street meltdown and the COVID-19 pandemic. Small community banks are here for their customers through every stage of the economic cycle, as they have been for decades.

Given our cautious approach, Washington lawmakers should ensure whatever regulations resulting from the SVB and Signature Bank closures do not harm community banks which are much smaller than the mega banks.

As responsible financial stewards, community banks should be exempt from restoring losses to the Deposit Insurance Fund, and there is no need for new regulatory burdens from Congress or financial regulators. Small lenders, and their customers, should not have to pay for the miscalculations and speculative practices of large financial institutions.

If anything, the collapse of SVB and Signature Bank shows that the existing tiered regulatory model works. Rules should recognize and account for institutions of different sizes and risk models. Given the continued stability of local banks, lawmakers need to ensure policy changes support community banks and only target the risky practices of other, larger complex lenders.

These bank failures highlight the strengths of community banks. Local institutions are ready to explain their business model, and ready to compete against larger banks for your deposits. Community banks are ready to meet you anytime, anywhere to show members of our community our responsibility is to you, not to Wall Street or Silicon Valley.

A.J. King is CEO and chairman of Three Rivers Bank of Montana.