Stock Market Insights: The Fed's two hats

DR. RICHARD BAKER, AIF®, is the founder of and an executive wealth advisor at Fervent Wealth Management. https://www.facebook.com/Dr.RichardBaker

"If the women don’t find you handsome, they should at least find you handy,” said Red Green, who was more a TV guy than a philosopher. Small banks may not seem mighty, but they sure are handy.

Banks have to have deposits to make loans. Here is how it works; An older couple puts $100,000 into a certificate of deposit, earning 4%, and the bank turns around and gives that $100,000 to a young couple to buy a house and charges them 5%. The bank uses its customer’s money to make loans to other customers and keep the difference in rates for expenses and profit. But if the bank’s deposits fall like they are now, they can’t approve as many loans.

The banking “crisis” talk has calmed down, but people are still nervous. According to the Federal Reserve, 120 billion dollars has moved from smaller banks to the 25 largest U.S. banks in the last few days since the failure of Silicon Valley Bank. That was the biggest transfer of deposits from small to big banks in history.

It seems bank customers have decided to reduce their exposure to smaller banks by moving more of their money to bigger banks. This strategy is putting pressure on smaller banks.

The smaller banks, who sponsor your kid’s baseball and volleyball teams, must work harder to make a profit. Not only do they have fewer deposits to use for loans, but they are being forced to pay higher interest rates for their savings and CDs to encourage depositors to keep their money local. Paying more for deposits though necessary, starts cutting into the bank’s profits.

A lot of businesses and individuals prefer small banks because they get a more personal touch, but right now, perceived strength is trumping personal service. The megabanks just keep getting bigger. The two largest U.S. banks, JPMorgan and Bank of America, now have almost a quarter of America’s deposits combined.

Many smaller community banks are competitive because they have the homecourt advantage, whereas the ‘bigs’ don’t have many branches in small-town America. But if this trend of bank deposits leaving for big banks continues, we will see a credit crunch where small banks make fewer loans which would slow community growth and hinder small businesses.

When a local bank struggles, the people in their communities often have less access to credit. I won’t say megabanks don’t care about smaller communities, but those communities are for sure not their focus.

What’s happening is natural. Bigger banks that appear more stable and diversified are getting more deposits. This consolidation happens every time there is nervousness about the banking sector. But I’m pulling for the little guy.

Small banks make our communities better. They employ our neighbors, sponsor our kids, and know your name. Small banks may not always be handsome, but they are handy.

For those of you missing Red Green, my buddy Blake, the biggest Red Green fan I know, tells me some streaming apps let you watch the Red Green Show 24 hours a day, which is handy.

Have a blessed week!

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