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Jeff Marsico is President of The Kafafian Group, Inc., a community bank consultancy specializing in performance measurement and strategy.
According to recent media coverage, things have been looking grim for small banks. On March 25, CNN wrote, “Deposits at small US banks dropped by a record amount following the collapse of Silicon Valley Bank on March 10, data released on Friday by the Federal Reserve showed.” On April 16, The Wall Street Journal reported, “Small and midsize U.S. banks lost hundreds of billions of dollars in recent weeks to their bigger peers and to money-market funds offering higher yields.”
The source of the above assertions was none other than the Federal Reserve, which publishes its H.8 report weekly, showing growth in numerous balance sheet categories for large and small FDIC-insured financial institutions. It defines “large” as the top 25 banks. It defines “small” as all others. The problem: the cutoff asset size for “small” is around $80 billion in total assets. Would you say Banco Popular, at $68 billion in total assets, is small?
In my opinion, there is an issue in the lack of clarity around the nuances that come with financial reporting—in this case, that of the Fed’s H.8 weekly report—and the way it’s communicated by the media to the public. Aside from its broad definition of large and small, the report is only estimates, based on weekly reported data from a sample of about 875 domestically chartered banks and foreign-related institutions. In this regard, the Fed’s H.8 is hardly the report to draw hard conclusions about possible bank runs.
Many banks like to paint themselves as “community banks” and imply they are small. PNC runs ads that it is a “Main Street” bank. Though I’m sure they have branches on many Main Streets, PNC had $562 billion in total assets and $436 billion in deposits on March 31, 2023. Their deposits declined from $450 billion a year earlier, on March 31, 2022, according to S&P Global Market Intelligence.
In fact, when comparing March 31, 2023, to one year ago, eight of the top 10 financial institutions based on total assets had fewer deposits. The exceptions were U.S. Bancorp of Minneapolis and CapitalOne. If you were a headline skimmer, you would not know this.
There is no go-to definition of what constitutes a community bank. And certainly not a great one that defines a small bank. A community bank tends to have a limited geographic footprint. Depositors can feel comfortable that their money is being lent within their town or at least within a tight radius of their town. Community bank executives and employees are typically known and visible in their communities.
Based on size alone, it’s likely a customer has a more personal relationship with a community bank than with a large bank. Remember PPP loans, trying to get a big bank representative on the phone? Many businesses didn’t have a relationship manager at those large banks because their business was too small to have one assigned. That same business would likely get a community bank’s A-team. It’s these strong community ties and long-standing relationships that helped steady the nerves of depositors regarding their local, “small” bank when confidence in the banking system was shaken.
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In fact, banks with less than $1 billion in total assets grew deposits by 1.5% from March 2022 to March 2023, according to my firm’s analysis of S&P Global Market Intelligence data. Banks with between $1 billion and $10 billion of total assets grew deposits more at 3.3% during that period. Larger, yet still “community” and “small” banks between $10 billion and $25 billion grew 2.0%. It was banks over $25 billion that lost 4.1% of total deposits. But that is not what you were getting from the headlines.
Overall, deposits did leave the banking system during that period. Banks of all sizes struggled to keep pace with rapidly rising interest rates, the market-priced alternatives to bank deposits such as U.S. Treasuries and online banks that had high-yielding assets funded by high-priced deposits.
But costs increased more at larger banks. The cost of funds at banks greater than $25 billion in total assets increased 148 basis points—from 0.19% to 1.67%—from the first quarter of 2022 to the first quarter of 2023. By comparison, banks with less than $1 billion in total assets experienced a cost of funds increase of 62 basis points. The larger the size of the group of banks measured, the higher the increase.
News outlets were using week-over-week changes in deposits and exceptionally broad definitions of “large” and “small.” After Silicon Valley Bank failed due to a bank run by nervous depositors, Signature Bank failed two days later for the very same reason. This risked systemic contagion, particularly for any bank customers with over $250,000 of deposits, the FDIC insurance limit. This is why our regulatory bodies took bold action. No bank can withstand losing significant amounts of their deposits all at once. This risk is particularly acute in our age of online and mobile banking.
The lack of understanding of the data could have led to fomenting fear that community bank managements were trying to quell on the Monday following the SVB and Signature failures. Fortunately, “small” or community bank management teams jumped on top of the symbolic teller line calming the fears of their depositors just like Jimmy Stewart playing George Bailey in It’s a Wonderful Life.
Banking is a trust-based business. Banks don’t have all or even most of their depositors’ money sitting in vaults. The community bank, just like the Bailey Building and Loan, puts those deposits in loans to businesses and people in their communities. Media outlets should decide if they want to play the role of Potter and fan the flames of panic in trying to generate click-bate headlines.
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