After some banks failed earlier this year, a shockwave of fear and anxiety rippled throughout the country, but local experts say the banking system as a whole is sound.
Michal Cann, chairman of the board at SaviBank, said the banks that failed were outliers.
He said he believes several factors played into their problems, including poor interest rate management, risky investments and the amount of withdrawals customers made when word spread about their financial situations.
Cann said, in simple terms, a bank takes deposits and turns them into loans or investments.The difference in interest rate between what customers make off deposits and what the bank receives on investments is how banks make money.
Silvergate Bank failed after investing heavily in crypto currency and Silicon Valley Bank was a large lender for start-up tech companies, both of which are risky investments.
Cann said these banks were not making as much on their investments as they were paying in deposits.In order to get more cash on hand Silicon Valley Bank had to pull out investments early.
This created fees — and additional losses — for the bank.
Cann said Silicon Valley Bank also had a large amount of uninsured deposits.
“The success of every financial institution is dependent upon the confidence that customers making deposits today can withdraw them tomorrow,” Peoples Bank Chairman and CEO Charles LeCocq said in letter published March 13 after the Silicon Valley Bank failure.“The banks that failed did so because customers lost faith that their money was safe and secure.”
Cann said these issues don’t represent the banking system as a whole.
“The community banking system is safe and secure,” he said.
“The rest of the banking system is strong, too.It just had some outliers.”
Rising interest rates have been hard to keep up with.That has made for smaller profit margins, but not enough to cause concern, he said.
Most community banks, such as SaviBank, have a balance of deposits, assets, investments and available money that makes it easier to manage the small amount of profit losses in its portfolio.On top of that, should something occur, nearly all deposits would be covered either by federal insurance or other means, said Cann.
“We’re well balanced enough that it’s not an issue,” he said.
“(Other local banks too) are strong.They have good capital.”
Cann said investments made by SaviBank are safe.They include short-term certificates of deposit.
“We don’t do (crypto or fund start-ups) …it’s too risky,” Cann said.“We’re very basic.”
The letter from LeCocq stated that Peoples Bank also relies on core deposits to fund loans and not on other possibly volatile sources.
“We have been serving customers for over 100 years because we avoid making decisions based on short-term gains, so we can stay focused on our long-term financial strength,” the letter from LeCocq states.“Our risk management strategy is designed to protect our investments and customers from market volatility.”
While some customers have come in nervous, Cann said he thinks the situation is beginning to settle.
The Federal Reserve increased interest rates by 0.25% on May 3 in its latest effort to battle inflation.
The inflation rate has been declining, and in April sat at 4.9%, according to U.S.
Bureau of Labor Statistics.This is compared to 6% in January and 8.3% in April 2022..
