News & Events

So What is Going on with the Banks?

Everyone is most likely aware of the collapse of Silicon Valley Bank (SVB) and Signature Bank in New York. There has also been disturbing news surrounding Credit Suisse and First Republic Bank.

So what is going on?

Essentially, these institutions fell victim to a perfect storm. This is not to say there were not mistakes by management but a number of, factors converged to create a “run” on the bank. If you are not familiar with the term “run” and would like a simple, yet excellent, overview of a bank “run” you should watch the scene from the 1946 film “It’s a Wonderful Life” when George Bailey (Jimmy Stewart) is about to leave on his honeymoon.

As Jimmy Stewart explains, no financial institution has all of its depositors money sitting in a vault. Financial institutions “borrow” money from those with extra cash (depositors) in exchange for dividends and services (checking accounts, debit cards, online and mobile banking, etc.) and they lend it to others in the community (borrowers) so they can use it to buy homes and cars and start businesses. Depositors occasionally take out some of their money, when they need it, and borrowers repay their loans through regular payments. Under normal circumstances this arrangement works wonderfully. However, when a large number of depositors all decide to withdraw their money at the same time, problems arise. In order to satisfy everyone, the bank would need to call its loans (and if borrowers had the money to pay the loan back they wouldn’t be borrowing) and liquidate its other investments. The result is a liquidity crisis, or, put another way, not enough cash to honor all of the withdrawals and continue the bank’s operations.

Normally tight liquidity can be managed and will not result in a bank’s collapse but in these instances, somewhere along the way, depositors began to question the stability of SVB and Signature Bank which caused customers to withdraw large amounts of cash and move it to other institutions. This information spread to other customers (primarily through social media) and those customers also began withdrawing their funds. This exaggerated the liquidity problem creating a “run” on the bank.

In the case of SVB and Signature, their deposits were highly concentrated among a small number of depositors (more than 80% of deposits were uninsured by the FDIC) so it only took a few depositors emptying their accounts to deplete the bank’s liquid assets (money they use for operations). They had invested in certain government securities that had declined in value due to higher interest rates (that is whole different discussion) which resulted in significant losses when those investments were sold. They also made loans to some risky businesses, many of whom are not yet making a profit. In the case of Signature bank, they secured many of their loans with questionable collateral like Bitcoin which has decreased in value recently. These banks also did not maintain a healthy level of net worth. Instead of holding on to their profits as retained earnings, and using them as a cushion for difficult times, they paid out most of their income to stockholders. All of these things, coupled with a loss of depositor confidence resulted in the collapse of these institutions.

At Advantage Financial we operate much differently than an SVB or Signature bank. We have a net worth in excess of 10% which is well above the 7% regulatory requirement. Our deposits come from our members, over 9,000 of them, and not from businesses. We lend money to many of those same members so they can purchase homes and cars and generally maintain a healthy financial life. We do not make risky loans and we purchase conservative investments. Nearly all of our share balances are insured. For the few members with uninsured balances, those members have the option to restructure the ownership of their shares using a combination of individual accounts, joint accounts and revocable trust accounts to increase the available insurance coverage to amounts far in excess of NCUA’s $250,000 threshold.

If you are interested in learning more about expanded insurance coverage please call us or review the NCUA brochure on insurance coverage.

Your deposits with Advantage Financial remain safe and sound and insured by NCUA.