Leaders with Yakima Valley-based financial institutions are reassuring their customers the failure of banks in California and New York in recent days is not indicative of national problems in the financial industry.
The presidents of Solarity Credit Union and Yakima Federal Savings and Loan Association said Monday that their customers have voiced concerns about Friday’s run on the Silicon Valley Bank and Sunday’s shutdown of Signature Bank in New York.
Their reply is that those institutions use a much different business model than Central Washington-oriented banks and credit unions, and customers and investors’ assets are secure.
“I feel like we really do need to assure our community that everything is OK from a banking system perspective,” said Mina Worthington, president and CEO of Solarity. “I think our community is well positioned and our local institutions are well positioned for anything.”
“Silicon Valley (Bank) specialized in lending to startups in the tech industry. I believe Signature Bank was also involved in cryptocurrency … they were acting as custodians or financing companies that were issuing crypto,” added Leanne Antonio, president and CEO at Yakima Federal. “There’s a good mix of banks and business models in our area, and I don’t believe anybody is in any kind of a risky niche.”
Why the two banks failed
Silicon Valley Bank was the second-largest U.S. bank failure, behind the 2008 failure of Washington Mutual, The Associated Press reported.
Federal regulators on Friday closed Silicon Valley Bank as investors withdrew billions of dollars from the bank in a matter of hours. They also announced Sunday that New York-based Signature Bank was being seized after it became the third-largest bank to fail in U.S. history.
Officials with the U.S. Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said Sunday that all Silicon Valley Bank clients will be protected and have access to their funds, and they announced steps designed to protect the bank’s customers and prevent more bank runs, AP reported.
Antonio noted the FDIC insures up to $250,000 of single investors’ deposits, as banks pay premiums into an insurance fund that for many decades has protected depositors.
A similar organization, the National Credit Union Administration, provides insurance coverage for depositors at credit unions, Worthington said.
Both noted that as problems began to mount at Silicon Valley Bank, investors who had uninsured deposits far above the FDIC insurance threshold began to panic.
“People got a little excited, maybe over-concerned, about the stability. That creates what they call a run on a bank, where many depositors are taking their funds out,” Antonio said. “So Silicon Valley had to look at, how are we going to get more cash into our banking system? They would have to liquidate some assets, would have to borrow money — it just set up a bit of a panic.”
Increases in interest rates over the past year-plus affected the value of Silicon Valley Bank’s securities, Antonio said, forcing them to sell off Treasury bills, bonds and other low-risk investments without obtaining full value for them. This prompted more investors to withdraw their funds, eventually leading to the bank’s failure.
“This should be an isolated incident,” Yakima Federal CFO Dan Gaulke said. “Silicon Valley had a lot of tech start-up money. A lot of their deposits were companies that had millions and millions of dollars in accounts, and a lot of that was uninsured. They were starting to get a little worried about that bank’s health, so they started taking them out.
“That’s quite a bit different than at Yakima Federal, or most other … it’s hard for me to speak on behalf of other banks, but most community banks that are smaller, their exposure to that kind of risk is a lot less than somewhere like Silicon Valley or Signature banks,” Gaulke added.
“It’s important to point out about both of those bank failures that those banks were very specialized,” added Solarity’s Worthington. “Those banks were structured for the best interests of their clients, right? But their clients just happened to be really volatile industries.”
Interest rates and inflation
Antonio, Gaulke and Worthington all agreed that the two bank failures will make next week’s Federal Reserve decisions regarding interest rates more interesting and difficult to predict.
Many news organizations and financial analysts were expecting the Fed to boost interest rates in its ongoing attempt to control inflation, but the past week’s developments could cause the agency to back down, Gaulke said.
Worthington serves on the Community Depository Financial Institutions Advisory Council with the Federal Reserve Bank of San Francisco, a group of 12 community banking and credit union CEOs who advise the Fed on what’s happening in their local markets.
She said the council’s most recent meeting in February gave her optimism about the nation’s banking system. The 2008 financial crisis was about credit quality and housing, and that is not the case today as regulators monitor banking systems more closely.
“The Federal Reserve gives us reports every year on the health of the banking system, and overall, the health of the banking system is good,” Worthington said. “Overall we are in a much, much better condition in the country than we were prior to the 2008 financial crisis.”
The relative health and safety of the nation’s financial institutions does not mean a recession isn’t possible in 2023, Worthington added. Annual inflation rates between 5 and 6 percent are what prompt the Fed to raise interest rates, which tends to discourage investors.
“I do see that inflation — the Fed sees that inflation — hasn’t curtailed to the degree that they would like it to. That’s why the Fed keeps talking about increasing rates, because they try to get inflation down to 2% a year,” she said. “The Federal Reserve Bank’s job isn’t to stop a recession. Their job is to stop inflation.
“I see recessionary indicators, because our members are spending down their checking accounts. They’re paying more for the goods and services they need,” Worthington added. “We’ve heard a lot about wage increases, and we’ve experienced that as an employer as well. I think that people are spending that money at the grocery store, or at the gas station.”
Antonio said that whatever bumps lie ahead on the national financial road, her bank is equipped to handle them. She noted Yakima Federal’s tier one capital ratio was 25.04% at the end of 2022, well above the federal requirement of 9% for well capitalized financial institutions.
“Yakima Federal’s been here since 1905,” she added. “We’ve made it through two world wars and the Great Depression, several recessionary periods, and we continue to be a safe place for our depositors and their money.”
Solarity’s Chief Credit Officer Ralph Cumbee added that his financial institution has more than twice the capital on hand than is required by federal regulators.
“Solarity is an exceedingly healthy credit union with great capital and loan quality,” Cumbee added.
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