News from the world of banking over the last few weeks has been unsettling, both at home and abroad, but how has that affected West Virginia’s financial institutions?
The collapse of Silicon Valley Bank and its subsequent bailout by the Federal Deposit Insurance Corporation (FDIC), as well as the insolvency of several other banks across the country, has created worries about the stability of the entire banking industry.
Brant Hammer, associate professor of finance at West Virginia University, said Silicon Valley Bank (SVB) was in a uniquely unstable position due, in no small part, to its role in the tech industry.
“With Silicon Valley Bank, they had about 50 percent of their deposits concentrated in these tech firms,” Hammer said. “That customer base is not only concentrated in that one industry, but most of those deposits are large. The vast majority of them were uninsured deposits greater than $250,000. In fact, 97 percent of them. There can’t be five banks in the country that have more uninsured deposits than Silicon Valley did.”
As Hammer noted, $250,000 is the maximum bank deposit that the FDIC will insure.
There are a lot of other factors at play in SVB’s collapse, including rising interest rates and poor management practices. SVB got itself into a position where depositors lost confidence and rushed to pull their money out before the bank collapsed completely. This is commonly known as a “bank run.”
Hammer said that unlike the banking crashes in 2008, where credit was the underlying issue, SVB and other institutions that have needed help over the past few weeks faced a crisis of cash flow. Think of the Frank Capra classic, “It’s A Wonderful Life,” but with billions in venture capital funds.
“It didn’t start a week ago,” Hammer said. “The primary difference between what’s happening now and what happened in ‘08 is that what happened in ‘08 was a credit crisis, it was an issue of credit quality, meaning loans, going bad, people defaulting and that leading to losses of banks, which led to insolvency, which led to bailouts. This is the exact opposite. This is a liquidity crisis. This is a problem not of assets being worthless. This is a problem of assets of banks, essentially not having enough cash on hand to meet deposit withdrawals.”
Hammer points out that Silicon Valley Bank’s fate has spread to other institutions because people started paying attention to banks in similar positions, overinvested in unstable industries like tech and crypto, with too many uninsured deposits. As it relates to West Virginia’s banks, Hammer said they’re much more traditional and well-positioned to handle market volatility. His concern is what happens to the industry after things settle back down.
“I’m not worried about this problem resulting in people in West Virginia losing their deposits,” Hammer said. “I’m worried about this problem leading to an even more rapid consolidation of the banking industry, because it is the large banks that are benefiting. I just saw a headline this morning that just since the Silicon Valley crash, Bank of America has seen an inflow of $15 billion in deposits. It’s leading to a flight of deposits out of regional community banks and into the big four.”
Those big four banks are JPMorgan, Chase, Bank of America, Wells Fargo and Citibank.
Local leaders agree with Hammer that the state’s financial industry is generally insulated from what’s happening. On March 14, State Treasurer Riley Moore released a statement assuring West Virginians that the state’s $10 billion Consolidated Fund of short-term investments for the state and local governments had no exposure to SVB or other banks in crisis.
“There’s some unique things that are happening with SVB, Signature and some of those other cryptos. Part of that as well, is that at times, as we’ve seen, there’s a lot of volatility there,” Moore said.
Hammer and Moore both agreed that SVB’s uniquely large deposits of venture capital funds didn’t allow the bank to build a basis of loans and other, traditional capital diversification.
“Taking all these deposits as it relates to venture capital, where they’re not able to do capital formation and raise more money around a given venture, when they need to draw down cash immediately, that’s how you run into some of these problems,” Moore said. “Obviously, our banks here in West Virginia, are well diversified in terms of their deposits, in terms of the loans that they do. They’ve worked very diligently to hedge risk.”
Moore said that West Virginia is lucky to have a healthy variety of banking institutions – more than 40 – across the state, and specifically more community banks that focus on local relationships and businesses.
“We have a lot of community banks here in the state, I mean, tons of small community banks, that are really a hub and a central linchpin for the communities in which they operate in,” Moore said. “I think West Virginia does have a healthy diversification as it relates to community banks, middle market type banks. We’re very fortunate, I think, to have a very healthy community banking sector, as well as middle market banks.”
Adding to a well-diversified financial environment, Moore adds that the state’s banking system simply isn’t involved in the high-risk industries that made up the majority of SVB and Signature’s portfolios, things like venture capitalism, speculative tech startups and cryptocurrency.
“It’s a diverse type of business. Obviously, there’s a lot of banks here that are involved in the fossil fuel industry, to one extent or another, since that’s so large in the state of West Virginia, but it’s also a lot of small business,” Moore said.
That stability is reassuring because for now, there’s little that can be done on the state level.
“Our hands are kind of tied when the federal government is deciding to continue to raise interest rates. We’re all subject to that, everybody in the country is,” Moore said. “Obviously, that’s a challenge that we all face. I’m here to support the community banks and the banking industry at large in the state of West Virginia anyway that I can. But our hands are tied to a degree unfortunately, on some of this. There’s not too much we can actually do.”
An official in Gov. Jim Justice’s office said, “the West Virginia Division of Financial Institutions is closely monitoring developments together with state and federal counterparts.”
