Banking Industry Update
Last week’s failure of Silicon Valley Bank (SVB) definitely created some uncertainty in the banking industry. The timely decision by the Federal Deposit Insurance Corporation (FDIC) to make sure all depositors of SVB receive 100 percent of their deposits positively addressed much of this uncertainty. Fortunately at Midwest Bank it has been basically business as usual. There have been a few phone calls and discussions with customers about the SVB situation and the potential impact it might have on Midwest Bank but in terms of customer activity, it truly has been business as usual.
While the FDIC’s decision definitely helped, I also believe our customers know that our conservative approach to banking results in a financially strong bank without the challenges that led to the failure of SVB. That belief is correct but I want to provide further evidence of why that confidence in Midwest Bank is justified.
The banking industry realized sizeable deposit increases as a result of significant government stimulus following the pandemic. The management of SVB made some really poor decisions with the increased customer deposits. While they invested the vast majority of these dollars in safe investments, they invested them for long-time frames (ten years or more) in an effort to earn additional income. They did earn more in the short-term but when interest rates rose significantly, the value of these investments declined dramatically. As of year-end 2022, the decline in value equaled 98% of their capital. When numerous large depositors withdrew their funds, it forced the bank to sell these assets at huge losses which resulted in their failure.
While Midwest Bank also realized significant customer deposit increases, we invested these deposits in very conservative, short-term investments. As a result, when interest rates climbed, the impact on the investments was minimal. We could sell all of our investments today and still be considered well-capitalized, which is the highest capital designation a bank can receive.
Secondly, unlike SVB which had their deposits concentrated in the venture capital and technology industries with numerous very large deposit customers, deposits at Midwest Bank are well-diversified with long-time customers that consist of individuals and businesses.
Lastly, banks are required to perform stress tests to see if the bank is capable of absorbing stressful financial events. One area that is tested and definitely applies to the current situation is a bank’s liquidity. The test basically measures whether or not the bank could fund a large decrease in deposits. While the parameters of this testing can vary, a common stress test is whether a bank could absorb a ten percent decline of deposits in one week and a twenty percent decline in three months. Because of our conservative approach, we could absorb a fifteen percent decline in one day and a thirty percent decline in one week.
I want to thank everyone for your support of our Midwest Bank and I hope I have provided information that supports your confidence in our bank. If you have any questions, please do not hesitate to reach out. My email address is [email protected] and my direct line is (218)844-2964.