Concern over stability of Charlotte banks after failure of SVB?

The banking system has been rocked by the failure of California-based Silicon Valley Bank and New York-based Signature Bank over the past week. While the failures have sent shockwaves worldwide, what’s been the reaction in Charlotte? We’re focusing all of our attention on that this week in our conversation with Tony Mecia of the Charlotte Ledger Business Newsletter for our segment BizWorthy.

Marshall Terry: Ok, Tony, these were smaller regional banks, and we have similar ones in Charlotte. Are they concerned about a run on deposits now that confidence in these smaller banks is shaken?

Tony Mecia: You know, Charlotte is a big banking center. We have big banks here. We have smaller regional banks here. Just remember the genesis of this problem is too many people taking money out of a single bank. Banks get money in from depositors. But, you know, they don't keep that money in the vault. So if you go in to ask for your money, they don't necessarily have your money. They take most of the money they get in deposits and they loan it out or they invest it, or they make money on it in other ways. And so the problem happens when you have too many people asking for their money back and the bank just doesn't have that cash. That's what happened here with Silicon Valley Bank. And, so yes, it would be a problem for regional banks, like ones that we have in Charlotte — if they had a whole bunch of people taking out their money all at once. Now, there are reasons to think that that is not going to happen. The number one reason is because the federal government insures deposits up to $250,000. And a lot of these smaller banks, their depositors have money in the bank under that amount. The problem with Silicon Valley Bank was that it had a lot of venture capital firms, tech companies and startups that had money in there above that amount. And so that sort of created some panic among that bank. So I think there are some differences there, and there's some reasons to think that isn't going to happen with regional banks with Charlotte ties.

Terry: Now, part of the problem with Silicon Valley Bank was the sale of bonds. It sold a huge chunk of bonds for a loss to cover its losses in deposits, which in turn made the run on deposits at Silicon Valley Bank worse. Now, Tony,. I'm not a business reporter. Can you help me understand that a little bit better?

Mecia: Yeah, I think actually you said it pretty well, Marshall. You had tech company startups that were burning through money because they've —in this environment — have been unable to raise venture capital or do IPOs or things that would bring money in. So, they've been burning through that money. And so the deposit amounts at Silicon Valley Bank, where a lot of tech company startups and venture capital firms bank, those deposit amounts were declining. And so to try to be able to pay those deposits, Silicon Valley Bank sold a bunch of bonds that it had invested in, sold them at a loss. When that happened, that created a bit of a panic from these depositors saying, ‘Well, gosh, they don't have the money? They don't have my money? They need to raise additional money? I better get my money out of there.’ And then it created really a cascade effect. And once that happens, that's a classic run on the bank that banks just can't survive because they just don't have that amount of money handy.

Terry: And do we know if any Charlotte area regional banks are facing any similar risks like that?

Mecia: I mean, they are in the sense that they have investments in these bonds. I mean, it's not uncommon for regional banks, banks of all sizes really, when they have deposits in, to try to park it somewhere that — at least until recently — was considered a pretty safe investment. So, yes, there are investments that regional banks and other banks have in these same kinds of bonds. Bank of America, for example, holds a lot of bonds. But it's not really a problem unless they have to start to sell those at a loss — at which point that could sort of escalate concerns. You know, the federal government did take some action this last weekend to make sure that banks of all sizes had access to liquidity, that they had access to cash that they could put out. So, they are trying to mitigate some of that risk. And, again, it’s not really a risk unless you have a big run on deposits and there's no evidence that is really endangering any particular bank at this point.

Terry: Well, we've been talking about some of the smaller regional banks. You mentioned Bank of America there a moment ago. What does all this mean for the big banks like Bank of America and Wells Fargo?

Mecia: Well, ironically Marshall, even though it's been a tough last week or so for bank stocks, it actually works out pretty well for the bigger banks. Because you do have depositors who are taking money out of these smaller banks — worried about them — and putting them into the bigger banks on the theory that there's no way the federal government would allow big banks like Bank of America to fail — the term is "too big to fail". And so they're actually seeing a surge in deposits. Bloomberg News reported this week Bank of America has added $15 billion in deposits over the last few days. That’s almost as much as they added in the entire fourth quarter of 2022. So they're seeing really an influx of money and, really, the big bank stocks are not being hit as badly as some of the regional banking stocks.

Terry: And this has kind of been the opposite of what we have been seeing for a while, right? People leaving the bigger banks to go to these smaller regional banks because they offer better returns.

Mecia: In many cases, that’s the case. You know, that is one way that banks compete, is on offering different rates. Certainly Silicon Valley Bank had a lot of perks for tech companies that had raised money. That is part of the competition, I guess in, in the banking industry. I think you're seeing some people now sort of look at ‘OK, where is my money? Is it safe? Am I holding more money than I should at a bank?’ So you're getting people asking a lot of those questions.

Terry: You reached out to some local financial advisers about all of this. What are they telling their clients?

Mecia: Financial advisers, they a lot of times, tend to take the longterm view and they say things like, ‘Well, just understand if you're investing for the long term, if you have retirement money that you don't need for several decades, you know, that money really shouldn't be sitting in a bank in large quantities to begin with. You should have it in the stock market. — which I know, maybe at the moment doesn't look like a great idea, but long term, it does show returns.’ And then also they said, ‘Look at the bank where you have your money, and is it money that is FDIC insured?' Remember that's up to $250,000. So, Marshall, if you happen to have an amount over $250,000 in some crypto bank in Nova Scotia, you might want to take a look at that. But if you don't, if you have a deposit in a bank that's up to $250,000, you should be good.

Support for WFAE's BizWorthy comes from UNC Charlotte's Belk College of Business, Sharon View Federal Credit Union and our listeners.