RACE TO THE BANK

Three local bank CEOs share their thoughts on the recent bank failures

BY DREW HAWKINS

DID YOU KNOW? Bank failures are more common than most people realize. Since the year 2000, 565 banks in the U.S. have failed.

In 1656, the royal court of Sweden granted a Latvian-born German/Dutch/ Swedish entrepreneur, financier and financial innovator named Johan Palmstruch permission to start a bank. His institution, Stockholm Banco, was the first in Europe to give out banknotes. Palmstruch is actually credited with the introduction of paper money in Europe. The idea took off and business was booming — for a time.

The bank began to lend more and more, and after a short while, the value of the banknotes began to plummet. By 1664, less than 10 years after its founding, Stockholm Banco shut down, and when its clients tried to get their money back in the world’s first bank run, they couldn’t. Palmstruch was imprisoned and the Crown took over the bank, forming the Riksens Ständers Bank, which still exists today as the national bank of Sweden and is operated by the country’s parliament.

Over the next few centuries, there were many more failures that led people to race to their banks to try to pull out their deposits — sometimes literally.

During a financial panic in 1855, a man named Louis Remme went to the local branch of his bank in Sacramento, California, only to be told it had gone into liquidation and he couldn’t get his money. The news traveled by steamship so Remme hopped on his horse and raced to Portland, Oregon, to beat the ship and withdraw his money from another branch before they found out about the liquidation.

There are many differences between the first bank failure and future ones — not just that a CEO was actually held liable and imprisoned. But at the end of the day, when a bank overextends or inflates its assets and people get worried about their money, panic can turn a financial problem into a full-blown catastrophe.

In March, we saw a $42 billion bank run on Silicon Valley Bank (SVB) based in Santa Clara, California — the biggest bank run in history. It was soon followed by another run at Signature Bank of New York. These failures set off financial tremors in the U.S. and Europe and led the Fed and other government agencies to back all deposits at the two banks, even though nearly 90% of both banks’ deposits exceeded the $250,000 insurance threshold. The Fed also established a new lending program to make it easier for banks to raise cash if needed.

But while these bank failures may have people worried about the security of their own finances, local experts say clients of Louisiana banks have no reason to panic because banks in the state don’t dabble in the kinds of risky investments or follow the business models of SVB and Signature Bank.

“The bank that failed first, Silicon Valley Bank, is supposedly [run by] the smartest people on the planet,” said Guy Williams, CEO of Gulf Coast Bank and Trust. “And what happened to them is as the bank was growing very rapidly, every tech company banked with them. It was sort of a badge of honor to bank with Silicon Valley. It showed you’re one of the cool kids.”

The problem, Williams said, was the bank grew from $50 billion to $200 billion and then started to buy long treasuries and long mort- gage-backed securities. These seem like safe investments — they can’t default, and you’ll get your money back — but the bank bought them when interest rates were very low. However, when the Fed raised rates, and the tech companies that made up the majority of SVB’s clientele started using their money, “Silicon Valley had to start selling some of these long mortgage-backed securities,” Williams said. “And because of the rate differential, they were losing money every time they sold the security.”

When SVB went to Wall Street to do a new stock offering to raise funds and fill the hole, and brokers did their analyses, they realized that if the bank sold all its securities, they wouldn’t have any net worth. SVB would be bankrupt.

“Then the panic started,” said Williams, “and because they’re in a very technical industry, once the panic started, the whole world panicked.”

That panic led investors and consumers to take a look at how their own banks were doing business.

In the age of email and social media, news often travels much faster than individuals can outrun it. “[Investors] were using it to tell people to get their money out of Silicon Valley Bank,” said Williams. “In one day, they lost 25% of their deposits.”

The speed of the bank run was unprecedented, and the unstable investments contributed to the panic, but prior to the bank run, management problems at SVB and Signature Bank contributed to their failures.

“One of the very basic elements of bank management is knowing your customer and knowing if you have any concentrations within either your loan portfolio, or your deposit portfolio, which was the case here,” said John Leblanc, CEO of Metairie Bank. “You had this accumulation of deposits from a particular sector. When things in that sector got difficult, they started withdrawing funds from that bank and the bank was not prepared to handle it.”

Leblanc said he believes the problem is now under control, and he notes, the events can’t be compared to the financial collapse of 2008, where housing securities underpinned the failures of many large institutions — essentially banks failed because they made bad loans. The issue here with SVB and Signature Bank — which also held a bit more cryptocurrency than average banks in their portfolio, a very volatile asset — was one of liquidity.

“No Louisiana banks have been directly affected by the closures, though many banks have seen clients asking questions about insurance coverages and perhaps moving funds around,” said Chris Ferris, president and CEO of Fidelity Bank.

Ferris added that those banking with Louisiana institutions can also rest assured that their money is safe and protected by the federal government. “FDIC insurance protects bank customers,” Ferris said. “In the FDIC’s 88-year history, no one has ever lost a penny of an insured deposit. It is completely funded by the banking industry, insures up to $250,000 per depositor, per bank, and has a $100 billion line of credit with the U.S. Treasury, which would, by law, have to be repaid by the banking industry if ever used.”T

Perspective Economic Development

In addition to serving as the board chair for NORBCC, PERRY SHOLES is president of Progressive HR Strategies Inc., and the founder of Corporate Internship Leadership Institute, a New Orleans based 501c3 fellowship program focused on professionally developing, mentoring, and coaching BIPOC college fellows for careers and citizenship. He may be reached at NORBCCChair@norbchamber.org.