The failures of Silicon Valley Bank and Signature Bank in March have caused depositors to take their money and run to the supposed safety of large banks. As a result, those smaller banks will likely be forced to increase their interest rates to keep customers. With upcoming first-quarter reports poised to reveal the magnitude of the damage, this financial ripple effect is still unfolding.
The Wall Street Journal recently published “Banks Are Finally Facing Pressure to Pay Depositors More”, in which author Gina Heeb dives into this ripple effect and chronicles how smaller lenders are losing valuable deposits to the perceived safety of banking titans under the looming shadow of the upcoming first quarter reports. The article highlights that some smaller banks have already started increasing their interest rates for savers, especially ones with deposits over the $250k insurance cap — PacWest Bancorp and Merchants Bank of Indiana are both offering over 5.4%.
As small banks raise deposit rates to hold on to and potentially grow deposits, this will force banks to charge significantly more on higher-risk real estate loans — can new real estate projects afford it going forward and will it allow refinancing current loans as they mature? For long-duration securities portfolios, which are being financed through deposits, the higher deposit rates will put pressure on margins and potentially force banks to sell lower-yielding assets at a loss.
What can smaller banks do to keep up with their larger counterparts in this turmoil? What can these banks offer that finance titans cannot? Perhaps part of the solution that bank boards and management should consider is a greater focus on relationship banking — if clients understand that they’re a priority to a regional or community bank but wouldn’t be at the larger counterparts, they could be willing to hold off on switching banks and accept lower deposit rates.
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