An earlier version previously published on CU Insight.
Update 3/: This article inspired an interview on the topic with Sarah Cooke of The CU Connection. Watch it here!
I love wild rides. Whether Disney or Universal, if it’s a new thrill, I’m in. But Silicon Valley Bank (and Signature Bank) failing, followed by the “will they, won’t they” of FDIC insurance?
“Excuse me, I think my Express Pass took me onto the wrong attraction.”
By the end of the weekend, we knew the FDIC wasn’t going to let depositors run dry. This was likely the correct action, given the economic dangers of lost banking confidence. I read some observers saying that without this guarantee, people would no longer trust regional banks.
Geek note: This does raise an interesting observation on the FDIC insurance limits. It seems like they only come into play if the impact isn’t considered potentially systemic. Otherwise, you are effectively insured for your entire balance.
SVB Isn’t (Wasn’t) A Typical Bank
But we have to recognize that nearly every financial institution, especially regional players, aren’t in anything close to the situation Silicon Valley Bank put themselves in. Community banks and credit unions are nearly all well capitalized.
Beyond that, they balance risk actively and regularly. I’m betting you won’t find long-term near 0% Treasury bonds composing their assets. The teams which handle these challenges have my applause, as it’s a thankless job, but also essential.
Granted, you’re not also managing accounts with tens or hundreds of millions of dollars, with some over $1B. This is a completely different banking environment. To me, such an institution should be subject to regular stress-testing.
Geek note: Of course, such regulatory requirements were eliminated a few years back under the previous administration. Could this have been prevented had those still been in effect? Who’s to say, but it may have been caught earlier.
In discussing our own services with clients, this focus on institution risk and member opportunity is always at the forefront. I’ve never spoken with a credit union which made a decision “willy-nilly”. Have you?
It might interest you to know that SVB didn’t even have a Chief Risk Officer during an enormous rising rate environment (while knowing they held now-diminishing value assets). I mean, the CEO also sold $3.6M in stocks a few weeks ago, so…
Venture Capital Has Issues, Too
We can spend weeks diving into the poor decision-making by the SVB leadership. It’s ok, we won’t (others surely will!). But we will take a quick look at their questionable relationship with venture capital.
I originally asked why SVB was the preferred lender for most Silicon Valley startups. Turns out, VCs often required companies to use them exclusively in their funding contracts. That doesn’t seem to have any conflicts of interest or red flags, no sir-ee.
This was the literal definition of putting all your eggs in one basket, a practice the Easter Bunny is famously known for doing. Hey, you stuff all you can into the basket you have!
Geek note: A kids plastic egg hunt shouldn’t be the model for billions of dollars in startup funding. But what do I know?
Moving forward, I think it’s essential we take a close look at the relationships between venture capital and financial institutions. Should this come through new regulations? Oh no! However you feel, it’s clear the current practice doesn’t work.
If only one bank is willing (or allowed) to hold your funds and extend you a line of credit, well, I know some risk people who would have something to say about that.
Credit Unions Are Fine And Also Impacted
Plenty of credit unions serve the tech community. None of them failed. To my knowledge, none are in any danger whatsoever. Since the news broke, I continue seeing announcements of how well-capitalized credit unions are, like this one from Dort Financial CU.
This comes as no surprise to me, and likely to you as well, dear reader.
Yet reality is only a part of risk. The other component is perception. That’s why financial institutions, regulators, and even the President came out with a unified message: The banking system is solvent. Your money is safe. The issues can be managed.
(As you know, the survival of the financial system is partially based on people believing the financial system is safe. If everyone withdrew their funds at the same time, you have a problem a la Bailey Building and Loan.)
Risk Management Beyond Survival
However you feel about the bail-outs, it’s apparent this will have a passthrough effect on regulatory behaviors towards all insured institutions. Are you managing all your risk today, while planning for potential challenges tomorrow?
Thinking bigger, this will have an effect on how startups behave, or even their initial creation. Entrepreneurship is a keystone of American economic progress, and while you could say VC funded efforts are their own category, the moods flow downstream.
While existing depositors have secure funds, their lines of credit are now dry. Can they continue operating? Startups are cash-flow heavy and revenue light (hence the funding). Can they meet payroll, or even want to hire for growth?
Does this affect the Silicon Valley mantra of “move fast and break things” (on its own, maybe not a bad idea)?
Does it have a cascading impact on economic activity from startups to larger corporations reducing funding in their “moonshot” divisions?
Will this have any effect on inflationary pressures?
I…have no idea. But it’s important to ask these questions. And beyond those, this is the perfect time to reiterate how credit unions operate, why they exist, and what you provide for members to protect their own financial security.
Credit Unions (And Community Banks) Have An Opportunity
People want security in uncertain times. Sure, Bank of America and Capital One will be fine no matter what happens, but do they also have your best individual interests at heart? The value of credit unions comes from their community connection.
In the words of one of my favorite Jimmy Buffett songs, “It’s My Job”:
I got an uncle who owns a bank, he’s a self-made millionaireMac McAnally, “It’s My Job”
He never had anyone to love, never had no one to care
He always seemed kinda sad to me and I asked him why that was
And he told me it’s because in my contract there’s this clause
That says, “It’s my job to be worried half to death”
And that’s the thing people respect in me
It’s my job but without it I’d be less
Than what I expect from me.
Our industry consistently shows this concern, and we’ve got one bonus his uncle did not: Plenty of people in the credit union world to love and care.
Since 2014, I have used this persona to help enhance CU member connection and community empowerment through barely-recognized sci-fi and Disney references. Ok, and also tangible recommendations.
A few banks and a bunch of venture capitalists did dumb things for a while. The consequences have arrived for some. Unfortunately, we’re all going to pay in some form.
This is where credit unions shine the brightest. Find your North Star and make sure members can see how it lights their way.