Local banker expresses confidence in banking system

Despite national concerns regarding banking in light of the collapse of Silicon Valley Bank and Signature Bank, government officials and banking experts are expressing confidence in America’s banking system.

According to the Associated Press, Treasury Secretary Janet Yellen has made it clear that the federal government is not planning to bail out the Silicon Valley Bank.

During an interview with CBS’ “Face the Nation,” Yellen said, “We’re not going to do that again, but we are concerned about depositors, and we’re focused on trying to meet their needs.”

Yellen assured Americans that the banking system is “really safe,” “well capitalized” and “resilient.”

John Felton, CEO of Southern Chautauqua Federal Credit Union, explained that the Silicon Valley Bank collapse was unique because it was a “venture bank,” not a “traditional bank” like the banks and credit unions in Chautauqua County.

“They were built to take on extraordinary risk, and that was the business model,” he said. “It’s unfortunate that with the Fed raising rates as aggressively as they have, that the downside of that for that institution is that their investments lost significant value.”

According to the Associated Press, the Fed has raised its “key rate” eight times over the last year, directly affecting both consumers and businesses in an effort to reduce inflation; however, rising interest rates have raised concerns about the possibility of a recession.

Asked how concerned people should be in the current banking system, Felton said people “really shouldn’t” be concerned.

“The majority of us, it’s going to be no effect whatsoever,” he said. “For some individuals that are fortunate enough to have several million dollars that they need to put in safe places like credit unions and banks, they just need to limit it to the insured level at that institution.”

Felton explained that every bank and every credit union’s goal is to attract deposits and then use the deposits in “activities,” such as lending money to members of credit unions. He added that no bank or credit union has all the money on deposit “just sitting someplace” such as an overnight account or a bank vault.

“Banks invest that money,” he said. “It’s what they’re supposed to do.”

While banks operate by investing money and lending money, Felton warned that the investments made by the Silicon Valley Bank were “a little risky.” Combined with the change the Fed’s rates, Felton said the bank’s investments were devalued.

As a result, when the bank’s depositors began taking out “very large sums of money,” the bank was “forced” to sell its investments to meet the demand for cash. Since the investments were no longer worth what the bank paid for them, Felton said the bank began losing money each time it had to sell an investment to meed the demand for cash.

“Some people, and probably I’m in this group, would say management should have planned better for this,” Felton said. “Management could have foreseen some of this, probably not to the extent that it happened. I don’t really understand what the catalyst was to the depositors. I don’t know who first said, ‘You know what, I want to get my money out of there.’ I don’t know how that manufactured, but then it turned into the herd mentality and the money was just going and going and going, and naturally, they didn’t have that cash sitting around, so it is understandable.”

Asked what can be done to guard against these type of issues with banking, Felton said most banks and credit unions, especially in Chautauqua County, typically limit the amount of money in a single deposit account to $250,000. The Federal Deposit Insurance Corporation and the National Credit Union Association guarantee deposits of up to $250,000, providing an additional banking safeguard. Felton added that depending on how accounts are structured, depositors can typically structure an account for up to $1 million.

“You don’t need to have more than a million dollars at any one institution, protect yourself by diversifying,” he said. “For some businesses, they have several million dollars of cash that they need to park somewhere. This institution in Silicon Valley allowed them to park it at their institution. They should have stopped, they should have put caps on it. They should have limited the amount of money they took from any one deposit.”

In the wake of Silicon Valley Bank’s collapse, Felton said the Fed met Sunday and sent an email out to bankers Sunday night detailing the steps they have taken to address the issue. According to Felton, the steps the Fed has taken to handle the bank collapse have been “appropriate.”

“This is not a bailout of banks; they don’t deserve a bailout,” he said. “This is protecting consumers and protecting businesses. With the government now guaranteeing all deposits at this institution, that should give everybody peace of mind.”

While Felton said he was not sure if the government would be able to manage the issue if a large number of banks found themselves in the same position as Silicon Valley Bank, he expressed confidence that new laws and regulations will be passed that will limit the “exposure” that credit unions and banks can take.

“In this case, I would call it concentration risk,” he said. “They were heavily concentrated on large deposits that were allowed by the current regulatory environment, but going forward, hopefully those regulations are changed.”

Felton explained that the credit union he oversees is currently in a stronger position than the Silicon Valley Bank. Felton said that credit unions operate differently than commercial banks.

“At my credit union, we take in deposits from community members and we turn them out and we lend them out to other community members,” he said.”

Felton said the Southern Chautauqua Federal Credit Union does not buy mortgage backed securities or invest in crypto. He warned that investments such as crypto are “way too risky,” and that his approach is to invest “right back” into the local community.

In addition to Southern Chautauqua’s investment strategy, Felton said the credit union’s capital ration is currently double the regulatory target, sitting at 14%.

“Capital is king,” he said. “Capital is previous year’s profits put aside for bad times, so any institution that has an extremely strong capital ratio is less likely to fail.”

According to Felton, the “most important thing” Southern Chautauqua does to protect depositors is to encourage community members not to deposit more than $250,000 at one time. He explained that the credit union is structured to avoid deposits of over $250,000 in order to avoid the risk of “rate sensitive money.”

In light of the recent bank collapse of Silicon Valley Bank and Signature Bank, Felton encourages people to bank locally.

“Use your local credit unions, your local banks,” he said. “You can go in and talk to the decision makers at all the credit unions in town. We’re all based in Chautauqua County in credit union land. The CEOs live here. We are very accessible. I give my cell phone number out to everybody. Bank local, deal with people you know. There’s a lot of internet based banks and a lot of institutions that you just don’t know, so it’s hard to really keep tabs on them.”


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