Recently the failures of a few unique and highly specialized banks have naturally caused depositors to pause and attempt to assess if their deposits are safe. Certain media professionals, bloggers and financials commentators seem to have a personal interest in promoting fear. Comparisons to the banking crisis kicked off by the Great Recession are overblown, irresponsible and are intended to create “likes” and headlines. In some small way, I want to take an opportunity to respond to the message of those who would stoke fear and share the perspective of a community banker, since it’s unlikely they have ever engaged with a community bank.
Looking back at the period known as the Great Recession, 468 banks were closed nationwide after the failure of Lehman Brothers in 2007 through 2012. While those economic times were terrible for everyone, you probably do not recall one thing: you probably do not recall hearing of any depositor losing money from their account, regardless of the deposit balance. There is a simple reason for this – when banks fail the FDIC sells those deposits to another FDIC insured bank that honors them. The common characteristic of failed banks then was a narrow focus and concentration in highly leveraged real estate development loans. Since the Great Recession, bank managers, boards and regulators implemented enhanced risk mitigation strategies including stress testing and stringent capital policies. Despite the stressful environment that even resulted in bank closures, every dollar of depositors’ funds was fully protected.
The banks that recently failed in California and New York were unique companies that focused on serving a very, very narrow segment of our national economy such as early-stage venture capital and crypto currency exchanges. Because of their focus, the number of depositors were small, and each controlled very high balances. Additionally, those depositors were very intertwined because they worked with and competed…
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