Protecting Community Banks In a Moment of Crisis

By: Hummayun Javed

At the beginning of the year, as the tides of the business environment were shifting, we were seeing a risk-off stance - a wait-and-see approach that included observing how business sentiment shifts but also how other investors act, and holding on to higher levels of cash than usual. This is a prudent approach in a rising interest rate environment that makes riskier investments look less attractive and incentivizes investors to take a flight to safety.

And then we saw Silicon Valley Bank (the 16th largest bank in the US) go through a historical collapse-exposing a part of the balance sheet most people thought was well-protected and not top-of-mind to protect against risk. The collapse led to a contagion of fears across similar mid-sized banks and an automatic flight towards the perceived “Too big to fail” category of large banks as the default choice. This is a deja-vu moment from the 2008-2009 financial crisis where a similar flight put community banks at risk.

About Community Banks

Community banks are banks with less than $10 billion in assets and form the backbone of local communities in urban and rural settings across the United States. According to the FDIC, as of year-end 2019, there were 4,750 community banks in the country with more than 29,000 branches in communities from coast to coast. A 2020 banking study from the FDIC shared that community banks represent 15 percent of the industry’s total loans but 30 percent of its Commercial Real Estate loans, 36 percent of small business loans, and 70 percent of agricultural loans.

The opportunity to consolidate

It is important to note that while FDIC insurance protects deposits up to $250K per accounts, there are ways to spread deposits across banks in a consolidated manner for larger cash positions. Silicon Valley Bank’s challenge was not about the $250K or less balances but the uninsured deposits in excess of $250k. According to S&P Global, uninsured deposits at large U.S. banks were estimated at $7.888 trillion at year-end 2022.

The opportunity for impact investors

While cash is something often overlooked in an impact investing portfolio strategy, impact investors have an opportunity to rise to the challenge of protecting community banks that are vital to small cities and rural areas’ businesses and economies against this flight, while still utilizing FDIC insurance and diversification as a tool for protection against unexpected outcomes.

This can be done through products and organizations that focus on using the large group of  community banks as the base for distributing deposits and helping them maintain stable capital bases, while at the same time providing protection to asset owners.

There are solutions available to have more than $250K insured by the FDIC and being impactful in that choice. Please reach out to your Align Advisor  for our preferred solutions in this space.