Will Regional Banking Collapse Mean Trouble for Small Business?

Banking collapse and selloff of Silicon Valley Bank, Signature Bank and First Republic Bank signal first wave of market uneasiness.

In March 2023, Silicon Valley Bank and Signature Bank failed, triggered by plummeting stocks, a fast response by regulators to prevent additional fallout, and concerns from many Americans over the safety of their money. Panicked Silicon Valley Bank clients removed $42 billion over the course of two days. On April 28th, First Republic Bank followed the initial wave of banking collapse, due to their high level of uninsured deposits and weakened position for a capital raise. JPMorgan Chase beat out three other bids to buy the First Republic portfolio for pennies on the dollar, an act reminiscent of their fire sale acquisition of Bear Stearns in 2008. As a result, 84 former First Republic locations will transition into JPMorgan branches within a week.

Is more banking collapse on the way?

In early May, PacWest Bancorp stocks were at an all time low (a drop of 72%), which left many questioning whether they would be the next bank to fall. PacWest stakeholders cited two major concerns for their future: first, a client base markedly similar to Silicon Valley Bank and second, interest rate hikes. Similarly, on May 3rd, Fed Chair Jerome Powell increased rates another 25 basis points, putting them into the 5.00%-5.25% range. This marks the tenth rate hike this cycle and the highest interest rates have been since 2007.

In the course of one day PacWest stock recovered dramatically, but other regional banks are not faring as well due to rising inflation.

After making the official rate raise announcement, Chairman Powell continued by saying, “We on the committee have a view that inflation is going to come down not so quickly.” Though experts noted his dialed back language relating to future increases, Powell also explicitly warned that cuts were not imminent. He stated, “It would not be appropriate to cut rates and we won’t cut rates.”

Regional banks like Western Alliance Bancorp (WAL), Comerica (CMA), and Zions Bancorp (ZION) are all impacted by the increase, their stocks noting dramatic downward trajectories. “Leaving rates this high is going to continue this stress,” Investment manager Jeff Gundlach said. “I believe with a very high degree of probability there’s going to be further regional bank failures.”

In the aftermath of this news, business owners are prone to feel uneasy and to question how, or when, additional banking collapse and interest rate increases will impact their operations. Furthermore, more data points will help economists make predictions about the imminent state of the economy–and how it will impact Main Street– including U.S. unemployment and payrolls reports, which Dow Jones predicts will rise by 180,000.

How will regional banking collapses impact small business?

Raj Tulshan, founder of Loan Mantra states, “This is the beginning of a significant credit tightening. It’s wise to use our U.S. economic history, looking back 15 years to 2007-2008 market behaviors. The gift of our history is to become prepared for potential uncertainties because we have data points from that time.”

Tulshan also reminds business owners that, while they do not assume the debt of these bank failures, they are also tied to the same economic ecosystem. Understanding what a bank failure is and why it can happen will enable a small business owner to make better financial decisions in the near future. As media continue to report potential bank collapses and contagion effects, you may have questions about breaking financial news.

Here are answers to your most common questions about the regional bank collapse:

What causes a bank to collapse?

A bank fails when the market value of its assets declines to an amount that is less than the market value of its liabilities. The insolvent bank either borrows from other solvent banks or sells its assets at a lower price than its market value to generate liquid money to pay its depositors on demand.

Why does a bank fail?

A bank fails when it can’t meet its financial obligations to creditors and depositors. This could occur because the bank has become insolvent or because it no longer has enough liquid assets to fulfill its payment obligations. This might happen because the bank loses too much on its investments.

What happens during a bank failure?

When a bank fails, the FDIC is required to use the least costly solution to resolve the failure. It will often sell the bank's assets to another bank. The FDIC may sometimes provide reimbursement beyond its coverage limits.

Who pays for a bank failure?

Despite what is discussed in the media, the taxpayers are not financially liable when a bank fails. Most often, bailout of a failed institution is covered by the FDIC reserve, which is replenished through special assessments to existing banks. However, small businesses are stakeholders in the process and can be adversely impacted by a bank failure. Often, bank failure(s) can lead to disruption in inventory, payroll and availability to get cash to cover costs or improvements.

What's a Bridge Bank?

A bridge bank is an institution that has been authorized by a national regulator or central bank to operate an insolvent bank until a buyer can be found. It is charged with holding the assets and liabilities of the failed bank until the bank is acquired by another entity or is liquidated.

How a Bridge Bank works

The FDIC has the authority, using a bridge bank, to operate a failed bank until a buyer can be found. Bridge banks may be employed to avoid systemic financial risk to a country's economy or credit markets. They can assuage creditors and depositors and prevent negative effects, such as panics and bank runs.

How do I know my bank is safe?

Go to the FDIC's BankFind database, where you can search for your bank by name and pull data. In the most recent wave of bank failures, aggressive lending can be a sign that your bank is not operating in a fiscally responsible way.

What's the difference between a credit union and a bank?

Banks are for-profit, meaning they are either privately owned or publicly traded, while credit unions are nonprofit institutions

What happens to my loan if my bank fails, is my loan forgiven?

Unfortunately, no. Loans held at banks that have failed are still your obligation to pay. Borrowers should be notified within a few days of a bank closure of where and when to send all future loan installment payments.

Photographer: Miquel Parera | Source: Unsplash

Should I be concerned my bank will collapse?

As a business owner, you may have concerns about the future of your bank. First, it’s important not to panic and to recognize the many federal safeguards and protocols in place to protect your money. Thousands of banks are and will continue to run successfully, including community banks, FinTechs or alternative lenders, and regional banks.

In the meantime, it’s important to know what is protecting your deposits despite banking collapse:

The FDIC protects your money. The Federal Deposit Insurance Corporation (FDIC) started after the Great Depression to protect depositors’ money. The FDIC automatically insures up to $250,000 in deposits per depositor and per insured bank. In the unlikely event that your bank collapses, the FDIC will reimburse your insured deposits, up to the $250,000 per person limit, if the deposit is maintained with an insured bank or credit union.

Bank Term Funding Program. The newly created Bank Term Funding Program provides additional funding to eligible depository institutions to help meet the needs of all their depositors. This Program is a safeguard for banks, and their clients, helping them meet their depository relationships and stabilize unsteady markets.

As a borrower, you can and should expect transparency and excellence from your lender. If any behaviors are giving you pause, it may be time to thoughtfully solicit a second opinion.

Here are the four most common warning signs of impending bank failure:

  1. A drop in deposits – A dramatic drop in deposits is concerning. The FDIC website contains year-to-year comparisons of total deposits for a bank. A sharp drop means other people intend to exit.
  2. Delayed financial reporting – If earnings are delayed in the financial reporting, this may be a sign that your bank is struggling with changes in valuations.
  3. Cuts in services – Healthy banks try to provide incentives for loyal customers. In a struggling bank, cost-cutting outweighs relationship-building. Hiking fees quickly to get the most from customers may also be a distress signal.
  4. Desperate deposit accumulation- However, banks that are desperate to hold onto your deposit relationship may offer you terms that are too good to be true. Be wary of terms that seem inconsistent with current market realities.
Photographer: Ethan Wilkinson | Source: Unsplash

What can I do to protect myself from bank failure?

As small business owners continue to watch the market, there are certain things to do to ensure your ongoing financial success.

  1. Tighten your belts. If this is a time for credit tightening, business owners ought to take deliberate stock of their books and streamline where and when possible.
  2. Speak to an advisor. Even the most financially-savvy business owners stand to gain from additional insight from trusted financial advisors. An advisor will help you navigate inflation and lending in a downturned market.
  3. Stay educated. Being financially literate and turning to experts who know the market will help you avoid the fear of banking collapse at every turn. Don’t assume your bank will fail because others are. Do choose prudent financial institutions to weather the storm alongside.

Loan Mantra is a one-stop FinTech and financial advisory service that democratizes the lending process. Loan Mantra provides corporate sized services and capital to entrepreneurs, small and medium sized businesses. Connect with our trusted team of Loan Mantra experts at 1.855. 700.BLUE (2583) or info@loanmantra.com.