Roger Lee
Local experts say that the sudden collapse of two large banks in recent days is unlikely to drag down regional banks that operate in Columbus.
Regulators closed California-based Silicon Valley Bank Friday after depositors rushed to withdraw their funds all at once in what was the second-largest bank failure in the nation’s history, The Associated Press reported. Two days later, regulators announced that New York-based Signature Bank had also failed and was being seized.
The collapse of the two banks in a 48-hour span fed fears that more financial institutions could fail, as depositors withdrew savings and investors broadly sold off bank shares on Monday while the federal government raced to reassure Americans that the banking system was secure.
Shares of some banks that operate in Columbus — German American Bank, Old National Bank and First Financial Bank — have declined since Friday to varying extents.
Though it is eerily reminiscent of the financial crisis from 15 years ago, it is unlikely that the collapse of those two banks will spread to local banks, in part because they have a different customer base, said Steve Mohler, an assistant professor of management at IUPUC. Silicon Valley Bank and Signature Bank largely catered to the tech industry.
“(The local banks) don’t tend to the same audience, the same target market that those banks do,” Mohler said. “But the basic framework of what happened could very possibly happen here as well.”
For his part, Roger Lee, a senior research analyst with Columbus-based Kirr, Marbach and Co., said the two banks that failed were particularly vulnerable and doesn’t anticipate any runs on banks in Indiana.
“We had a run on two banks that were very vulnerable because they were serving customers that benefited from very low interest rates,” Lee said. “…It’s definitely not a scenario where people need to panic. I think people can just keep banking with their bank as usual. I don’t foresee any of the banks that most people bank with in Indiana going out of business.”
The scenario
Silicon Valley Bank began its slide into insolvency after customers, largely technology companies that needed cash as they struggled to get financing, started withdrawing their deposits, according to wire reports.
The bank had already been hit hard by a rough patch for technology companies in recent months, and the Federal Reserve’s aggressive plan to increase interest rates to combat inflation compounded its problems.
Silicon Valley Bank held billions of dollars worth of Treasuries and other bonds, which is typical for most banks as they are considered safe investments. However, the value of previously issued bonds has begun to fall because they pay lower interest rates than comparable bonds issued in today’s higher interest rate environment.
That’s usually not an issue either because bonds are considered long-term investments and banks are not required to book declining values until they are sold. Such bonds are not sold for a loss unless there is an emergency and the bank needs cash.
“People in financial institutions got in the mindset that, ‘Well, interest rates are always going to be this low,’” Mohler said. “…Unfortunately, there’s this little thing called the pandemic that led to inflation that led to the Federal Reserve belatedly taking some really significant interest-rate action.”
In its fight to cool the economy and bring down inflation, the Federal Reserve has rapidly pushed up its benchmark interest rate from nearly zero to about 4.6%, according to wire reports. That has indirectly lifted the yield, or interest paid, on a range of government bonds, particularly two-year Treasuries, which topped 5% until the end of last week.
“Last year alone, the Federal Reserve increased interest rates over 4 points — that’s unheard of,” Mohler added. “…That, I believe, wasn’t forecasted by banks because it’s unusual.”
Silicon Valley, the bank that collapsed Friday, had an emergency. Its customers were largely startups and other tech-centric companies that needed more cash over the past year, so they began withdrawing their deposits. That forced the bank to sell a chunk of its bonds at a steep loss, and the pace of those withdrawals accelerated as word spread, effectively rendering the Silicon Valley Bank insolvent.
Local banks
As of the end of last year U.S. banks — including some banks operating in Columbus — held Treasuries or other securities with about $620 billion of unrealized losses, according to the Federal Deposit Insurance Corp. That means they would take huge losses if forced to sell those securities to cover a rush of withdrawals.
Ironically, a big chunk of that $620 billion in unrealized losses can be tied to the Federal Reserve’s own interest-rate policies over the past year, according to wire reports.
Old National Bank, headquartered in Evansville with locations in Columbus, reported holding $10.2 billion in investment securities with unrealized losses of $1.29 billion at Dec. 31 compared to $7.6 billion in investment securities with unrealized losses of $6 million at Dec. 31, 2021, according to its 2022 annual report.
The increase in net unrealized losses was “primarily due to an increase in rates impacting market values for mortgage-backed, U.S. government-sponsored entities and agencies and tax-exempt municipal securities,” the report states.
“As of Dec. 31, 2022, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery,” Old National Bank said in the report.
Old National Bank CEO Jim Ryan told The Republic that “every bank” has unrealized loss positions and doesn’t view Old National Bank’s positions as an issue.
“Everyone who owns a fixed-income instrument has this unrealized loss, whether they be an individual or a corporation,” Ryan said. “…But even if you take that into account, we all have strong capital positions and, obviously, strong liquidity. So, it’s really not an issue.”
Ryan also emphasized that the banks that serve Columbus are “very strong, healthy banks.”
“The banks in Indiana and the banks that serve Columbus are very strong, healthy banks,” Ryan said. “We’re all coming in with really strong profitability. We’re well-run, well-organized banks. We always tell people, ‘We’re an old-fashioned, basic community bank at the end of the day.’ And that’s boring, but boring is good at times like this.”
German American Bank reported holding $263 million in securities with unrealized losses as of Dec. 31, according to filings with the U.S. Securities and Exchange Commission. The Republic contacted officials from German American Bank, but they could not be reached for comment.
Archie Brown, president and CEO of First Financial Bank, said “almost all banks have unrealized losses in their bond portfolio” right now, but emphasized that First Financial Bank is well capitalized and “highly profitable,” with profitability that “has been strengthening” despite higher interest rates.
“(Silicon Valley Bank’s business model) is a very unique model that you won’t see from banks anchored in local markets here in the Midwest,” Brown said. “Our deposit base — you think about German American’s or Old National’s deposit base — we are anchored in our local communities. Our deposits are made up of local consumers and local businesses, very stable clients, and much more predictable than what you would see in the case of the clients that Silicon Valley had.”
“You can never say something can’t happen,” Brown said. “But would something like what happened there happen to banks like us? I’d say it would be more remote.”
