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Banks in Turmoil

6 months out from SVB’s failure, a bank president’s optimism has waned

Kai Ryssdal and Livi Burdette Sep 6, 2023
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Laurie Stewart, the head of Sound Community Bank in Seattle, says pressures to hold more capital will "impact our ability to serve clients and to be investable." Courtesy Sound Community Bank
Banks in Turmoil

6 months out from SVB’s failure, a bank president’s optimism has waned

Kai Ryssdal and Livi Burdette Sep 6, 2023
Heard on:
Laurie Stewart, the head of Sound Community Bank in Seattle, says pressures to hold more capital will "impact our ability to serve clients and to be investable." Courtesy Sound Community Bank
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Just about six months ago, the banking world was rocked by news of Silicon Valley Bank, a large regional institution, going under. SVB’s collapse set off a domino effect of other failures that spread to First Republic and Signature Bank

The turmoil strained the Federal Deposit Insurance Corp., which made all of Silicon Valley Bank’s depositors whole — even those who held uninsured deposits over $250,000. Now, the FDIC has approved new rules aimed at staving off any future cash-flow issues for bigger banks by, in part, requiring those with over $100 billion in assets to issue $70 billion in long-term debt. 

For Sound Community Bank, headquartered in Seattle, these rules wouldn’t directly apply. But Laurie Stewart, Sound’s CEO and president, said there will be trickle-down effects on the community banking world if banks are expected to hold more capital. 

“Community banks have traditionally made the unique loan, done the unique transaction,” Stewart said. “As you get bigger, in order to get through this cycle, you’re not going to be as creative a lender because it’s not scalable. As community banks continue to consolidate and they become bigger regionals, our communities will suffer.”

“Marketplace” host Kai Ryssdal talked to Stewart about the state of community banks six months after SVB jolted the industry. Below is an edited transcript of their conversation. 

Kai Ryssdal: OK, so it’s been six months or so. The last time we chatted was after the mishigas in March with the regional banks, and you at that point were kind of positive — actually, you were really positive — and I wonder how you are now six months later? 

Laurie Stewart: Well, you know, I’m probably not as upbeat as I was six months ago. The industry’s resilient, capital levels are good. Competition is fierce. But as time has evolved and regulators have reacted to those bank failures, there’s an increasing pressure for us to hold more capital. And the extent that that’s required is really going to impact our ability to serve clients and to be investable. For publicly traded banks, we have an obligation — obviously — to our clients, but also to our shareholders. And it’s harder to reward shareholders if you’ve got to hold more capital. 

Ryssdal: I want to get back to the whole investable thing and what that means for you in the marketplace, as it were. But can you help a layperson understand why you hanging on to more capital makes it tougher for you to do your job? 

Stewart: Well, let’s do just some basic math. If you’re a $500 million bank and you have a 10% capital level, that’s $50 million. And if you earn 1% on assets, which is a pretty good number for banks, you’re earning about $5 million a year. But let’s say the regulators say you have to hold 12% capital. Now you’ve got to make 5 million bucks for three more years before you can pay dividends and buy back shares. So it’s hard to reward shareholders if you have to hang on to more capital. I always look at it as a three-legged stool. We’ve got shareholders, we’ve got clients, we’ve got communities, and if we want to serve our communities, we have to keep growing the bank so we can do more lending. But that’s hard to do if we have to keep more capital. 

Ryssdal: I’m gonna go to the layperson well one more time, and I’m gonna ask it this way: People will hear this, and they will hear you — a woman with a reputation in the industry. You used to be the head of the [American Bankers Association] and all kinds of stuff. You’ve been doing this for a very long time, and our audience knows you. If you say you’re not feeling great about things, what’s a person to think who really doesn’t want to think about banks? We just want to put our money in and get it when we need it. 

Stewart: OK, this is what that person should think. So there’ll be small, family-owned banks, and then there’ll be more bigger regional banks — what I’m worried about is that middle of the road. Will there be banks that you can put your money in and feel really safe about? Of course. Will there be banks where you can get loans? Of course. But community banks have traditionally made the unique loan, done the unique transaction, and as you get bigger, in order to get through this cycle, you’re not going to be as creative a lender because it’s not scalable. And so as community banks continue to consolidate and they become bigger regionals, our communities will suffer.

Ryssdal: If you had, I don’t know, five years to play this out, what do you think the state of the banking industry is in this country?

Stewart: You know, Kai, the world is envious of our banking system because we have so many different charters, we have so many different sizes. There’s kind of a bank for everyone and every need, whether you’re a very big company or you’re the small hardware store down the street. I think when I talk to institutional investors like I did this summer, I think there will be fewer banks. And I think that has an impact on our communities. I think it’ll be tougher in rural communities. And I think creative kinds of lending and the way to work with businesses and consumers to help them make their financial dreams come true will be tougher if this push for capital continues.

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