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Community Banks Oppose Paying for Rescue of Failed Banks: A Matter of Fairness

by Indrajeet Giram
April 13, 2023
in Business, Markets
Reading Time: 3 mins read
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Community Banks Oppose Paying for Rescue of Failed Banks: A Matter of Fairness

Community Banks Oppose Paying for Rescue of Failed Banks: A Matter of Fairness

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Freedom Bank, a community lender with a conservative business model that primarily serves locals in Montana’s Flathead Valley, has expressed concern about being asked to help pay for the rescue of Silicon Valley Bank and Signature Bank.

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The community lender has a balance sheet measured in millions of dollars, while Silicon Valley Bank’s is in the billions. However, regulators recently took the unprecedented step of backstopping all deposits at both banks, resulting in a hefty $22 billion price tag that the Federal Deposit Insurance Corp (FDIC) now needs to recover.

The FDIC plans to impose a “special assessment” on banks, but it has not yet determined which lenders will need to pay. Don Bennett, CEO of Freedom Bank, believes that community banks like his should not be responsible for paying the cost of the rescue, arguing that they had nothing to do with the disaster that took place.

Bennett started Freedom Bank in 2005, and the bank has grown since then. However, its business model has not changed much, and decisions are driven by “common sense.”.

Community Banks Oppose Paying for Rescue of Failed Banks: A Matter of Fairness
source : cloudfront.net

Freedom Bank’s conservative approach to investments is a key reason why it has not incurred any losses in its portfolio. Unlike Silicon Valley Bank and Signature Bank, Freedom Bank did not heavily invest in U.S. government bonds when interest rates were low, a decision that has proven costly for the two banks.

This highlights the difference between the business models of community banks and larger banks that have more diverse portfolios. The situation highlights the challenges faced by community banks in the wake of the recent rescue of Silicon Valley Bank and Signature Bank.

While community banks like Freedom Bank did not contribute to the problem, they may be asked to help pay for the solution. This could have significant implications for the future of community banking and the role that community banks play in supporting local economies.

Small lenders are divided over the issue of contributing funds to rescue struggling banks, with community banks arguing that it is a matter of fairness. Banks in the United States are required to pay into the FDIC’s deposit fund, which provides insurance for deposits up to $250,000.

However, regulators have tapped into the fund to rescue Silicon Valley Bank and Signature Bank, even though the bulk of deposits at these banks exceeded the $250,000 insurance cap and should not have been insured by the FDIC scheme.

Community Banks Oppose Paying for Rescue of Failed Banks

Community banks, like Three Rivers Bank of Montana, are concerned about the additional financial burden this will place on them, with Three Rivers Bank paying $130,000 annually for deposit insurance. The CEO of Three Rivers Bank, A.J. King, argues that his bank has acted responsibly and should not be held responsible for paying for the mistakes of other banks.

Lawmakers are receiving complaints from community banks about being required to pay any special fee. During a recent Senate hearing, Senator Steve Daines, a Republican from Montana, expressed his concerns about responsible banks in his home state being forced to pay for the bailout of irresponsible coastal banks.

Community Banks Oppose Paying for Rescue of Failed Banks: A Matter of Fairness
source : fbnj.com

While the FDIC Chair, Martin Gruenberg, did not make a firm commitment, he seemed sympathetic to the concerns of community banks. The White House supports an exemption for small, community banks, but the decision will ultimately be made by the FDIC, who will release their proposal for the special assessment in May.

The banking turmoil of last month could have lasting impacts on smaller lenders such as Freedom Bank and Three Rivers Bank, regardless of whether the FDIC decides to exempt community banks from paying the fee.

Many community banks have already seen customers move their money to larger lenders, and they are anticipating more regulations on their businesses. For instance, the Federal Reserve is considering stress testing more banks, though it is expected to exempt smaller lenders.

Tags: #FDICbank failuresbanking crisisbanking industrybanking regulationscommunity bankscongressional actionDeposit InsuranceGovernment Interventionsmall business lending
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