Fidelity In The News

Investors across the country were spooked by the collapse of Silicon Valley Bank and Signature Bank over the weekend, but local bankers say the community bank system in Louisiana is safe and secure.

Fidelity Bank and NOLA Lending CEO and president Chris Ferris said the failure of Silicon Valley Bank, in particular, resulted from risky and short-sited behavior.

“Silicon Valley Bank invested in what I would call more risky assets,” Ferris said. “At one point, they were triple their deposits. They were flush with cash. What banks do with that cash is they invest in either loans to their business customers in their market, or they buy investments. SVB’s primary investment and loans were in one segment, the tech segment.”

With widespread layoffs from the technology sector making daily headlines, it is clear that, in today’s market, technology investments are not safe, Ferris said.

The Federal Reserve began flooding the market with cash during the COVID-19 pandemic, leaving banks with an extortionary amount of cash laying around. When banks have extra cash on their books, they tend to begin investing in the securities market by buying bonds and treasuries.

“They [SVB] happen to buy a lot of their bonds at a time when the rates were very low,” Ferris said. “Now, the yields are much higher. So, on paper it’s called an unrealized loss. We all have them, even in our own portfolios. We buy a stock and the value goes up or down in value over time.”

SVB ended up heavily leveraged in the bond market at a time when the rates were around two percent, but those rates soon jumped to around six percent due to the lingering effects of inflation, Ferris said.

“To meet the needs of their depositors, SVB was forced to sell $20 billion in bonds at a significant loss,” Ferris said. “People started to say ‘wait a minute, why would you do that? That’s a silly thing to do.'”

At that point, the remaining SVB customers who were not already pulling their money out of the bank began to do so in earnest, causing the bank to collapse. Ferris said SVB was overly reliant on money from venture capital. Money like that tends to come into the bank in the form of multi-million-dollar deposits.

The problem with that is, when venture capitalists pull their money, it also leaves the bank in multi-million-dollar chunks, Ferris said.

Home Bank Executive Vice President and Chief Banking Officer John Zollinger said the collapse of SVB and Signature Bank is alarming to investors in those particular banks, but he sees no need for anyone not invested in those banks to panic.

“People could be panicked, and I don’t think they need to be,” Zollinger said. “When you look at the failure of Silicon Valley and Signature, they are somewhat anomalies in the banking system as to how they operated.”

In addition to investing heavily in the technology sector, the two failed banks also invested in crypto, which contributed to their demise.

“That’s not what we would consider the norm in a community bank, like ours, and maybe even some of the larger banks that are in our market network,” Zollinger said. “We’re investing in our community. We’re not taking huge risks.”

Cryptocurrencies, as a whole, have declined as much as 50 percent in value in the last few months, Zollinger said, a situation that combined with the shaky tech sector to create huge losses.

Many headlines have been written since the failures of the banks were announced treating the collapses as a contagion, Zollinger said, but he firmly disagrees with that assessment.

“For me, the biggest messaging is that I want to make sure people feel comfortable that this is somewhat of an anomaly, given the situation,” Zollinger said.

Underlying the call for caution and steadiness, Zollinger and Ferris both pointed to the announcement by the Federal Reserve that customers of the two failed banks will have their money guaranteed by the government. Even though the banks failed, those customers essentially will not be affected in the long run thanks to that decision, Zollinger said.

“If people come in and try to take their money out of the system, the system doesn’t work. It’s a self-fulfilling prophecy. That will make the system collapse,” Zollinger said. “I think it is really important for people to understand how essential the banking system is to the economy of the United States, and the world, and without trust, there is nothing. Community banks and even the larger regional banks that are in our market, we’re all well capitalized. The system as a whole is strong. Like anything, there are bad actors or people who have different risk tolerances, and those are the kind of things where if there is a crack in the system, those cracks become chasms without trust in the system.”

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