Bank failures: what does it mean and how it happens

With the recent failure of Silicon Valley Bank, there has been a lot of talk of bank failures, and what that means. For the President and CEO of the Ohio Banker’s League (OBL) Michael Adelman, that has meant fielding a lot of questions from reporters as of late.

“We’re the trade association for the banks and thrifts in the state,” explained Adelman.

Adelman said that OBL has three legs to their mission in Ohio; government relations, product services, and education.

“We represent everywhere from tiny banks up through the largest banks and businesses in the State of Ohio,” said Adelman. As for the industry, he is confident. “The Ohio banking industry is solid, Our banks are well capitalized, they have good liquidity, and they’re well managed.”

As for the failure with Silicon Valley Bank (SVB), Adelman said that banks do fail, and usually it goes largely unnoticed by the public.

“Fortunately there hasn’t been one for three years,” said Adelman. He said that when failures do happen, regulators step in, a new buyer is found to buy and lead the bank, and that soon the only noticeable difference is the name on the marker out front. In the case of Silicon Valley Bank, Adelman said that it operated differently than most banks.

“What was meaningful about this situation is that its a very different model than any Ohio Bank, and a lot of banks in the county,” said Adelman. He explained that SVB served the venture capital and tech startup industry.

“They were highly concentrated in those riskier segments. They had a lot of exposure. It creates risk when you have concentration in the in

dustry,” said Adelman. As an example he said that if a bank was heavily invested in loaning money to soy bean farmers, and there was a drought, there would be massive problems.

“SVB focused on venture capital and tech startups. The tech world has had challenges with their valuations over the last year,” said Adelman. He said that the true demise of the bank came in the form an old fashioned bank run. “There was concern in their customer base as to the safety of the deposits in the bank, and because of that concentration, you had a small hand full of people that caused a lot of money to leave the bank quickly.”

Adelman wanted to be clear about one thing, and that is that every bank is FDIC insured.

“Every bank is FDIC insured, but what we’ve learned about SVB is that they had a uniquely high percentage of deposits that were not FDIC insured,” said Adelman. What this means, is that while the FDIC will insure up to $250,000 per account, the accounts at SVB had more money in those accounts than the insured amount.

“I’ve heard different numbers, but less than 10 percent of their deposits were insured. Compare and contrast that to the majority of banks in Ohio, and that number is going to maybe be 90 percent,” said Adelman. Adelman went on to explain that there are other legal means for banks to insure amounts above the FDIC amount through national programs. According to Adelman, those programs were not used by SVB. “The largest banks it could be 40% aren’t insured, but that doesn’t correlate that the bank is risky, it just means not all deposits are insured.”

Adelman said that the best things customers can do, is to establish a good relationship with their bank.

“I would encourage people to make sure they have a relationship with their local bankers so they can go to them in times of uncertainty, and put their mind at ease,” said Adelman. He went on to note that the current news cycle has actually lead to some unexpected events.

“That’s a part of what is rewarding in this news cycle. I’ve heard of so many instances where customers have gone into their local bank, and they’ve bought money in from somewhere else, because they said they know their local bank was in it for the long haul,” said Adelman.