David Samuels (name changed), an importer of watches, was a long-time customer of Signature Bank. He was devastated when he heard that the bank had failed and was concerned that he would not be able to recoup his money. Although he was somewhat reassured that his money was safe, he opted to withdraw his money from Signature and open an account with Chase. He certainly was not going to stay with Flagstar Bank, a subsidiary of New York Community Bank, which had bought Signature. “Truthfully, I had always contemplated switching to Chase, particularly because of my frequent international transfers, but the Signature and Silicon Valley failures sealed my decision to move my money,” he said.
It seems that many depositors in small and mid sized banks are moving their money into larger banks out of fear of an avalanche of failures by smaller banks. The early evidence is that the larger banking institutions realized an immediate surge in deposits and in fact posted strong profits last quarter. The experts say that the larger banking institutions were helped by higher interest rates and a U.S. economy that keeps growing and adding jobs even as the Federal Reserve attempts to curb inflation.
According to various news reports, JPMorgan Chase & Co. posted a 52% jump in its first-quarter profits. “The bank saw deposits grow noticeably, as businesses and customers flocked to the banking titan after the failure of Silicon Valley Bank and Signature Bank last month.” JPMorgan grew deposits by $37 billion during the quarter, up to $2.4 trillion. Other large banking institutions also saw a major infusion of deposits.
The larger banks are not exactly gleeful at the problems of the small and mid-size banks. Many bankers feel that if confidence in banking is shaken, albeit that the main culprit is smaller banks, that they too will suffer in the long run. In fact, after the failure of Silicon Valley and Signature Bank, JPMorgan helped put together a consortium of other big banks to keep First Republic Bank from being next to collapse. The banks put $30 billion in uninsured deposits into First Republic, a move that appears to have at least bought the midsize bank some time to repair its balance sheet and maybe find a buyer. One bank vice president told me that the banks rushed to save the First Republic fearing that it would trigger a domino effect collapse which would ultimately do great harm to the economy and their institutions.
The larger banks are also concerned that struggling smaller banks should not lean on them in the future, much the same way as struggling banks relied on government bailouts in previous bank debacles. Apparently the larger banks talk to each other and work as a group, which is how they made the decision to underpin First Republic. Midsize banks are also part of the Mid-Size Bank Coalition of America (MBCA) which serves as the premier voice of these institutions. MBCA members include banks with assets between approximately $10 and $100 billion. MBCA, however, is not an organization that can rescue their member institutions financially.
It appears that the instability has resulted in unprecedented scrutiny of the performance of banking institutions. “These were the most watched bank earnings announcements in over a decade, with market participants scouring the results looking for signs of cracks in the US banking sector. Those analysts looking for signs of the banking crisis were greatly relieved to not find any,” said Octavio Marenzi, CEO of the consulting firm Opimas LLC, in an email.
The expected ripple effect of the Silicon Valley and Signature banks failures apparently did not happen. The predictions that many other banks would also fail did not materialize. Economists who predicted that the higher interest rates imposed by the Feds would result in a weakened economy also were not entirely correct. “The U.S. economy continues to be on generally healthy footings — consumers are still spending and have strong balance sheets, and businesses are in good shape. However, the storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks,” one of the experts said.
Citigroup’s CEO Jane Fraser told investors that the bank now expects a “mild” recession at the end of the year, saying there are signs that consumer spending is slowing down. A report Friday showing shoppers pulled back on spending at retail stores supported that analysis. As the first quarter earnings are reported in the near future, there will be a spotlight on the smaller banks. As a category, the smaller banks are a very important part of economic life in the US. Community banks in particular became part of the fiber of many communities.
For many people the turbulence in the banking system gives them pause as to where to keep their money. Larger banks have the advantage of offering many more services than the smaller banks. Many are worldwide institutions and in a global economy can be much more important to a business. David Samuels found that switching to Chase would give him a more efficient way to make international transfers. He also found that Chase dealt with many corresponding banks in countries that he did business with. On the other hand, smaller banks may offer a more personalized customer experience. David had a very special relationship with a bank manager, a relationship he will sorely miss. He also said that the smaller bank somehow pays him a higher percentage of interest.
For many people, securing their hard-earned money is the primary concern. The federally insured banks have an advantage in that there is some protection against the possible failure of the bank. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. One does not have to purchase deposit insurance but simply open a deposit account in an FDIC-insured bank which automatically covers the deposit up to the limit. Banks have been around forever. The Gemara uses the term chenvani to describe a merchant or storekeeper, but it might also describe a banker. American towns may have had a general store, hotel/motel, a saloon, a restaurant but always a bank. Americans have had confidence in banks since the earliest time. One old timer said the choice was a bank or keeping money under the mattress and the bank won out because it was the institution that paid interest.