What California Bank Failures mean for Wisconsin Community Banks.
The recent news of bank collapses, such as Silicon Valley Bank, Signature Bank, and First Republic, may leave Wisconsinites feeling uneasy about the stability of the banking industry. However, it’s important to remember that these are unique and specific situations, and the vast majority of banks, particularly community banks, remain strong and resilient.
Why do Some Banks Fail?
Banks play a crucial role in our economy by collecting deposits and lending those funds to borrowers. However, banks can run into trouble if they make too many risky loans, experience high levels of withdrawals, or become too reliant on one sector of the economy. That’s why regulators closely monitor banks and require them to maintain certain levels of capital and liquidity to protect depositors. Despite these safeguards, some banks fail from time to time due to a variety of factors, including economic downturns, poor management, and fraud.
The collapse of SVB and Signature Bank is a testament to this reality. Both banks had a concentration within the tech sector, which is notoriously cyclical and subject to booms and busts. As their clients started withdrawing deposits, the issues mounted, and the end was inevitable. However, it’s important to note that these are unique and specific situations, and do not reflect the overall health of the banking industry.
How are Banks Connected to Each Other?
Banks are connected through holding each other’s deposits, loans, and interbank lending. Wisconsin community banks typically lend within the state (keeping the funds local), while California tech-based banks typically lend within their sector. Being in the Midwest, Fortifi and other Wisconsin community banks generally have more conservative lending practices, leading to a stronger bank network foundation.
Although not a tangible link, banks are also connected by the perceptions of the banking industry. If there is a widespread perception that the banking system is in trouble or that certain banks are at risk of failure, it can lead to a loss of confidence among customers and cause depositors to take their money out of a bank. This can cause a domino effect, called a bank run, where the affected banks become increasingly vulnerable to failure, which can then spread to other banks.
What is a Bank Run?
A bank run is a situation where many depositors withdraw their funds from a bank at the same time, typically due to concerns about the bank’s financial health. This can lead to a chain reaction, causing other depositors to also withdraw their funds and potentially causing the bank to fail. In the past, bank runs were more frequent and severe, especially during times of economic uncertainty like the Great Depression.
Nowadays, thanks to the implementation of measures such as the Federal Deposit Insurance Corporation (FDIC) insuring deposits up to $250,000, bank runs are less likely to cause widespread panic or financial instability. Regulators and central banks also take measures to provide liquidity to banks, further reducing the risk of bank runs.
To illustrate the concept of a bank run, here is a video clip from the movie “It’s a Wonderful Life,” which shows a dramatized version of a bank run in 1928. George Bailey also explains the true importance of community banking:
Community Banks vs National Banks
Wisconsin’s community banks, like Fortifi Bank, are a safe and sound alternative to trendy online banks and high growth specialty banks. Deposits at community banks come from local businesses, municipalities, and thousands of individuals who live and work in our towns. During the Great Recession of 2008-2009, many banks suffered significant losses, and some even failed. However, community banks were generally more resilient than larger banks. According to the FDIC, only 0.7% of community banks failed between 2008 and 2012, compared to 4.3% of larger banks.
Community banks remain well capitalized and well positioned to serve their clients and communities for many years to come. Fortifi Bank has been “Growin’ Wisconsin” for 147 years. We have thrived through all sorts of economic conditions, recessions, and even the Great Depression. We have a board of directors with a mission to remain a local and independent community bank.
While news of bank collapses can be alarming, it’s important to remember that these are rare and isolated incidents. Community banks, like Fortifi Bank, remain strong and stable, even during difficult economic times. As a customer of a community bank, you can feel confident that your deposits are safe and that your bank is committed to serving your local community – right here in Wisconsin.
Sources:
• “Bank Failures and Bank Runs.” Federal Reserve Bank of St. Louis, 14 June 2018, https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-23-bank-failures-and-bank-runs.
• “Bank Failures in Brief.” Federal Deposit Insurance Corporation, 27 Jan. 2022, https://www.fdic.gov/bank/historical/bank/.
• “Bank Runs.” Investopedia, 4 Nov. 2021, https://www.investopedia.com/terms/b/bank-run.asp.
• “Community Banks.” Federal Deposit Insurance Corporation, https://www.fdic.gov/regulations/resources/cbi/.
• “It’s a Wonderful Life (1946) – Bailey Bros. Building & Loan Scene.” YouTube, uploaded by Movieclips, 24 Dec. 2013, https://www.youtube.com/watch?v=YB2U9aUOv6E.
