May 8—George Bailey saved his bank from a run by convincing residents to keep their money invested in their local community.
Today, regional bankers are channeling their inner Bailey (played by Jimmy Stewart in the iconic movie "It's a Wonderful Life") as a combination of poor business models, rising interest rates and panic have led to the second-, third- and fourth-largest bank failures in the history of the country.
That fear, and a lack of understanding about banking regulations and safeguards, has fueled phone calls to local banks and convinced some people to pull their money out of smaller banks and make deposits into large corporate ones.
And that last part is what has Greg Deckard, president and CEO of State Bank Northwest, steaming mad.
"Jimmy Stewart is exactly the same model that we follow," Deckard said, referring to his portrayal of Bailey in the movie that debuted on Jan. 7, 1947.
In the movie, the fictional community members of Bedford Falls rushed Bailey and tried to pull out their money. Bailey explained that their funds were invested in businesses and homes, and they wouldn't get the same breaks from a larger company than they would from a community bank.
"Can't you understand what's happening here? Don't you see what's happening?" Bailey said in the movie. "Potter isn't selling. Potter's buying! And why? Because we're panicking and he's not."
Deckard said he's fielded nonstop calls from customers who want to make sure that their deposits are safe. Each time, he tries to assure them to keep their funds local.
"I'm an owner of our bank. We have five generations of customers who bank with us," he said. "We are in it for the long haul. We always, always, always take the least-risky route rather than chasing growth and earnings."
Making big banks bigger will not help the local economy, Deckard said.
"Do you think that money is getting reinvested on Division Street? It isn't helping that big banks are getting larger," he said. "They don't have the same level of investment in their local communities."
Carla Cicero, president and CEO of Numerica Credit Union, said organizations like Washington Trust Bank, STCU and her own can look their customers in the eye instead of them becoming one of millions of customers for an organization based in New York.
"We care about our members. We care about our communities," Cicero said of Numerica's 170,000 members. "This is where we do business, and the health of our financial institutions allow us to serve our customers and give back to our communities.
"If you move to a bigger bank that doesn't have that local connection, it's a disadvantage to everyone."
Dissecting the downfalls
The first of the recent bank failures was March 10 when Silicon Valley Bank, in Santa Clara, California, closed. SVB was largely described in national publications as a "regional" bank, but Deckard said SVB had branches in several states and abroad.
He said he considers Washington Trust, Banner Bank and Wheatland Bank, which generally are relegated to the area, as regional banks.
SVB, which he considered a national bank, catered to venture capitalists by providing loans to start-up companies, including some in Spokane.
The bank, however, relied almost exclusively on backing those loans by investing in 10-year treasury bonds, which are issued by the U.S. government. But those earlier bond purchases were put at risk as soon as the Federal Reserve started raising interest rates.
"Regulators asleep at the switch," Deckard said. "As soon as the venture capitalists heard about it, they started calling everybody to get their cash out of there."
Two days later, on March 12, New York-based Signature Bank, which largely catered to cryptocurrency investors, likewise failed after investors grew worried about its holdings and rushed to withdraw funds following an earlier collapse of the cryptocurrency markets.
On Monday, First Republic Bank of San Francisco closed, and federal regulators allowed its assets to be assumed by JPMorgan Chase Bank.
First Republic built its business model on catering to affluent customers, such as Microsoft co-founder Bill Gates, with low-interest loans and mortgages.
"There are some commonalities with all three," Deckard said. "They all had rapid growth in the last three years using exotic business models with a high reliance on uninsured deposits."
All three banks "mismanaged in a rising-interest rate environment and suffered the results," he said.
The FDIC insures every deposit up to $250,000. But all three banks relied on customers who put funds in their banks that far exceeded that amount.
In most cases, those deposits were used to purchase long-term investments, such as 10-year treasury bonds or 30-year mortgages at very low interest rates.
Normally, those investments are among the safest to make, Deckard said.
If a bank purchases a mortgage or 10-year treasury at a 1% interest rate, however, those investments are put at risk if the Fed decides to raise interest rates on future lending. If the investors or banks remain patient, both the treasuries and mortgages, even at low interest rates, will eventually pay off.
If enough customers decide to pull their deposits, however, the bank is then forced to cover those withdrawals by selling long-term bonds and mortgages at a steep loss.
"Generally speaking, when (interest) rates rise, values of investment portfolios go down," Deckard said. "If you bought it at a low price and rates rise, you are underwater if you had to sell that bond today.
"That's exactly what happened with the savings-and-loan crisis. A mismatch between liabilities and assets. It's banking 101."
Between 1986 and 1995, roughly a third of all savings-and-loan institutions closed. Most had issued low-interest mortgages before, but in 1979, the Fed began to raise interest rates to stifle inflation.
In 1996, the U.S. General Accounting Office estimated the collapse of savings-and-loans costs American taxpayers about $132 billion.
Then and now, the public grows frustrated when the government uses federal dollars to either secure the deposits of the three recent bank failures or to support the savings-and-loan industry, said Grant Forsyth, the chief economist for Avista Corp.
"But they are intervening for a reason. The system is designed for the government to intervene so you don't have a bigger crisis," Forsyth said, "including what we saw during the Great Depression."
Neither Deckard nor Forsyth said they see the same systemic problems in the banking industry, including a reliance on subprime loans for homes that weren't fully backed by collateral, that caused the Great Recession of late 2007, which had implications on Spokane's economy for years.
"To be honest, I'm not really worried about a systemic banking crisis like we've seen in the past," Forsyth said. "I just don't see this spinning out of control."
Regulating the regulators
With higher interest rates, local business officials say it's become much harder to secure loans for commercial development and other businesses, such as breweries and restaurants.
Doug Yost, vice president of development and acquisition for Cowles Real Estate, is developing apartments and townhouses at River Landing at Mirabeau in Spokane Valley. He said lending has recently tightened.
"It's extremely difficult" to get new funding, Yost said. "Banks are requiring more equity up front, and they are charging higher interest rates."
Local contractors are working on a ton of local projects that mostly were funded prior to the recent hikes, Yost said.
"But some new projects have not moved forward because ... of higher interest rates," he said. "That is definitely slowing the projects."
John Bryant, owner of No-Li Brewhouse, said he wishes good luck to anyone trying to get a new restaurant loan.
"Banks do not want to loan to breweries or restaurants right now. It's just too volatile," Bryant said. "I would say it's a combination of debt is rising and fear. Business runs on emotion. Americans are pulling back on spending."
The very nature of banking is managing risk, Forsyth said.
"Taking risk is part of the deal," he said. "The problem for regulators is how much leeway do you give banks to take risk, which is an integral part of a market-based economy. What's the right balance?"
Banks don't need more rules, Deckard said. He just wants the current rules to be evenly applied.
Just this past week, Deckard said he received the postmortem report on the failure of Silicon Valley Bank.
Federal Reserve regulators sent notices 31 times to SVB's board, warning them that their assets and liabilities were out of balance.
"But it never escalated above board attention. No punitive actions were ever taken," Deckard said. "That infuriates me and everyone else in the industry."
He said if Washington state regulators sent similar warnings to his bank's board, he would "have to address it immediately or you face fines and penalties."
He noted that up to the day it failed, Greg Becker, the president of CEO of Silicon Valley Bank, was also serving on the board of directors at the Federal Reserve Bank of San Francisco.
"It's not for me to say it made a difference, but it's not a very good look," Deckard said of Becker's dual positions. "I can't emphasize to you enough that regulators knew about it and didn't do anything about it."
Deckard said state regulators require him every three months to review his available funds and liabilities.
He's also required to model what happens to his bank's bottom line if the Fed raises interest rates up to 4% or lowers them by 4%.
"I will tell you that the basic business model of banks, that take in local deposits and make local business loans, has never been stronger," he said.
Bryant, of No-Li Brewhouse, said he banks locally for a reason.
"If you go to big banks, that money is going somewhere else," he said. "I'm banking on Spokane. It's a beautiful big-small town. Every dollar I makes goes back into the community. We want to be part of giving people hope."
Despite the high number of calls, Deckard said most of his customers understand the value of local ownership and said his deposits have grown since the three banks collapsed.
"It's pretty simplistic for some clients to understand," he said, "that if there is local ownership and local management, that their bank is going to be run differently than a bank on Wall Street that only cares about returns."
