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Understanding the Differences between Community Banks and Large Financial Institutions in the Wake of Recent Bank Failures

The financial sector has been under intense scrutiny after the failure of two large financial institutions that specialized in high-risk industries, such as the cryptocurrency sector. Some depositors in local communities might be wondering what this means for their hard-earned money. But consumers — and policymakers in Washington — must distinguish between community banks, including the members of the Independent Community Bankers of Colorado (ICBC) which have been serving consumers and small businesses in Colorado for decades, and these large banks with a much different business model and risk profile.

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Large banks have significantly different business models and risk profiles than your local community banks. Indeed, the financial institutions recently closed by regulators were nothing like the local community banks that help the nation’s consumers, small businesses and their local communities thrive. Before its closure on March 10, Silicon Valley Bank (SVB) was the 16th largest bank in the nation with $213 billion in assets at the end of 2022.

Much of this growth was propelled by tech companies that were flush with cash during the COVID-19 pandemic — depositors who quickly began withdrawing their funds amid concerns about the bank’s liquidity. It was a boom-and-bust cycle fueled by SVB’s heavy concentration in a single sector of the market. Signature Bank of New York, which failed just two days later, also suffered from a concentrated balance sheet. Fueled by the SVB panic, depositors quickly began to withdraw their funds. Regulators closed the bank to prevent additional bank runs and to ensure that the Federal Deposit Insurance Corporation (FDIC) would be able to make depositors whole.

In fact, the Deposit Insurance Fund, which the FDIC uses to insure deposits, has a record-high balance. Americans do not have to worry about the safety of their deposits. That is especially true for customers of community banks.

Community banks’ unique and time-tested business model is best suited for U.S. consumers and business owners. These types of banks stress one-on-one, face-to-face relationships with the small businesses and residents they serve and are dedicated to looking out for their customers’ long-term interests. Community banks are small businesses themselves and their reputation of strength, access and nimbleness is extremely important in the communities they serve.

Community banks adhere to established safe and sound banking practices that have served our community for generations. As the FDIC’s latest Quarterly Banking Profile attests, community banks’ asset quality is favorable, total deposits are stable, and capital ratios remain strong.

This isn’t the first-time community banks have weathered a financial crisis. They were the stable institutions during the 2008 Wall Street meltdown and the COVID-19 pandemic. They never cease to be there for their customers through every stage of the economic cycle and have been for decades.

READ: 5 Ways Small Business Owners in Colorado Can Survive Inflation

Washington lawmakers should ensure that whatever regulations and policy changes resulting from the SVB and Signature Bank closures support — and do not harm — community banks like ICBC members and only target the risky practices of other, larger lenders. As responsible financial stewards, community banks should be exempt from restoring losses to the Deposit Insurance Fund; these banks and their customers shouldn’t have to pay for the miscalculations and speculative practices of large financial institutions.


Mike Van Norstrand 225x300Mike Van Norstrand is the Executive Director of the Independent Bankers of Colorado.