Connecticut Post (Sunday)
COULD IT HAPPEN IN CONNECTICUT?
What you need to know about the tech bank failures
Last week's failures of Santa Clara, Calif.-based Silicon Valley Bank and Manhattan-headquartered Signature Bank naturally raise questions about the impact close to home. Simply put, people get nervous when they think they might not be able to access their money. And although the collapse of SVB and Signature has more to do with the technology sector than with the average Connecticut resident's personal finances, those failures sent many across the country scurrying to their local bank branches.
The Federal Deposit Insurance Corp. insures accounts with up to $250,000 in deposits. But if you are fortunate enough to have more money deposited in your local bank, what then?
Here's what you need to know about the banking crisis:
How did we get to this situation?
Silicon Valley Bank was the first to collapse late last week, followed by the seizure of Signature Bank. The primary focus of both banks is serving companies in the technology sector. When too many customers of Silicon Valley Bank tried to withdraw their money all at once, federal regulators seized it.
What happened is known as a bank run. Silicon Valley Bank was forced to sell treasury bonds and other securities at a steep loss. As word of the crisis spread, more people tried to withdraw their money.
When that happened at Silicon Valley Bank, regulators also seized Signature Bank to prevent a bank run from happening there.
“What happened was they hit a perfect storm in terms of liquidity,” said Brian Marks, a senior lecturer of economics and business analytics at the University of New Haven and executive director of the school's Entrepreneurship & Innovation Program.
Should I have confidence in the nation’s banking system?
Absolutely, according to the experts who spoke with Hearst Connecticut Media.
“Here a reason for optimism,” said Bruce
Adams, president and chief executive officer of the Credit Union League of Connecticut. “The regulatory system worked swiftly, and it worked well. Think about how much we have learned as a country about responding to crises like these: During the Great Depression, when we had runs on banks, we didn’t know what to do, and it took us years to figure it out.”
Federal regulators responded to the current crisis by guaranteeing all deposits at the two banks and creating a program to help shield other banks from a run on deposits.
On Thursday, members of Connecticut’s congressional delegation joined dozens of other lawmakers to introduce the Secure Viable Banking Act. The proposed legislation would repeal Title IV of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which raised the asset threshold at which a bank is considered and regulated as a “systemically important financial institution” to $250 billion. That exempted SVB from regular stress testing and enhanced liquidity, risk management and resolution plan, or “living will,” requirements.
The lawmakers’ new bill would repeal the regulatory rollbacks, which allow banks to load up on risk and increase profits. Those regulations had been key parts of the Dodd-Frank Act of 2010.
What’s the next federal response?
Industry consultant John Carusone, president of the Bank Analysis Center in Hartford, said regulators and political leaders need to start by reviewing what led to Silicon Valley Bank’s failure.
“There’s plenty of blame to go around,” Carusone said. “The institution is at fault for putting themselves into a mentality where bigger is better. Don’t tell me the guys who were running the bank didn’t know that they were exposing the bank to a higher level of fragility.”
Federal banking regulators also bear a measure of responsibility, he said.
“I don’t think regulators should have let them grow the way they did,” Carusone said. “There are interim steps regulators could have taken to say (to Silicon Valley Bank) that if you aren’t going to pump the brakes and make some changes, then we’ll make them for you.”
Adams said that in trying to develop new regulations to make bank failures less likely in the future, regulators will be faced with a difficult task.
“Will the regulatory reaction be appropriate, or will it be heavy-handed?” he said. “We should hope that some forward-thinking regulators can right-size any new regulations.”
Marks said that even as federal banking regulators deconstruct what happened and devise ways to prevent it from happening again, a policy debate will also occur among federal lawmakers.
“We can anticipate there will be a future policy debate that will run for a year or two,” he said.
Policy discussions will be complicated by political considerations, according to Marks, particularly with 2024 being a presidential election year. Another issue that could complicate the creation of new banking policy is whether most Americans see the actions taken by regulators and the Biden administration as a bank bailout, similar to what happened at the start of the 2008 recession.
Experts in Connecticut have said the actions taken by federal regulators in the current crisis do not constitute a bailout. But Marks said those actions — ensuring Silicon Valley customers recovered all of their money — could come back to haunt future leaders the next time a bank failure happens.
“In the future, people may look at it and say, ‘You did that for them, now you’ve got to do it for me,’ ” he said.
Could it happen in Connecticut?
Probably not, according to experts who have spoken with Hearst Connecticut Media.
“We’re not going to see systemic bank failures across the board,” Marks said.
Matt Smith, a state Department of Banking spokesman, said Connecticut residents should rest assured “that our banks are strong and their money is safe.” The department regularly examines banks and their assets, liabilities and risk exposure, Smith said.
“Connecticut banks and credit unions have, on average, a very different customer base than that of Silicon Valley Bank, and their deposits generally fall within the FDIC insurance limits,” he said, referring to the $250,000 cap often exceeded in the case of Silicon Valley Bank.
Carusone said that based on the most recent publicly available data, which is dated Dec. 31, 2022, most large regional banks with a significant presence in Connecticut are fairly well positioned to withstand the current industry volatility unscathed.
Why should I care?
Because the technology sector is one of the key drivers of the Connecticut and national economies, we all should remain aware of developments. While some experts agree federal banking regulators and the Biden administration have taken the appropriate steps thus far to address the problem, others argue that the crisis illustrates the fragile nature of the U.S. economy and increases the potential for a full-blown recession later this year.
Carusone said the nation’s largest banks “are pretty well steeled against any type of liquidity crunch” similar to the one the technology-focused banks faced.
“Those are the ones that could create the most damage” to the overall economy, Carusone said, referring to mega-banks like Chase, JP Morgan and Citibank as examples.
How do I protect my money if the crisis spreads?
Marks said the easiest thing to do to protect your money is not to have it all in one place.
“You should also diversify the portfolio of banks in which you have money,” he said.
Experts also recommend being aware of the basic terms under which deposits are federally insured and when they are not.
First, check to make sure that any bank you do business with is insured by the Federal Deposit Insurance Corp. Nearly all banks are FDIC insured, but you can check by looking for the FDIC logo at teller windows or the entrance to your local bank branch.
The National Credit Union Administration insures credit unions.
If your bank is FDIC insured and you have less than $250,000, you will get all of your money back. However, anything more than $250,000 is considered uninsured, and some experts recommend moving the uninsured amount to another bank.
That’s because according to the rules governing federally insured deposits, individuals who have multiple accounts at the same bank, like a savings account and a certificate of deposit, the total across those accounts is insured up to $250,000.