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Two Ideas for Helping Community Banks

By | Article, Insights

Understanding the Role and Importance of Community Banks

The recent failures of Silicon Valley Bank and Signature Bank focused a bright light on community banks. Community Banks are the heart of the US Banking system, numbering about 4,500 with this number decreasing by about 100 banks each year.

According to the FDIC, these community banks “play a vital role in the functioning of the US financial system and broader economy, from lending to small business owners and farmers, to providing critical banking services in small towns and rural communities across the nation.”

While flattering to the community bank segment, that definition of the role of community banks does not do these critical financial intermediaries justice. As of 12/31/22 community banks (banks other than the 50 largest banks in the US) –

  • Held almost $5 Trillion in deposits
  • Had almost $4 Trillion in loans on their books

loan and deposits 22 Q4

Source: FDIC Call Reports

Additionally community banks:

  • Provide about 60% of all small businesses loans
  • Originate more than 80% of agricultural loans
  • Have nearly 50,000 locations
  • Employ nearly 700,000 people

Source: Independent Community Bankers of America


The Challenge Facing Community Banks

Immediately following the recent bank failures, deposits flowed out of community banks and into large money center banks seeking the apparent safety of “too big to fail” banks.  While this surge has subsequently slowed community banks face significant challenges as interest rates rise, operating costs rise and the lines between mega banks and community banks seem more clearly drawn.

Here are two ideas for strengthening community banks

  • Make deposit insurance available in amounts larger than $250,000 per account. Deposit insurance is the only type of insurance where “one size fits all”. There is no magic in the FDIC’s insurance of $250,000 per account. It is not tied to an inflation-based formula, it has simply been raised by congressional action to deal with then-current conditions.


Since 1934 the amount of maximum deposit insurance has been raised seven times. It was last raised from $100,000 to $250,000 in 2008 to bolster waning depositor confidence in the banking system following The Great Recession.


While $250,000 deposit insurance is sufficient for most consumers, many investors and businesses could be enticed to remain at community banks if additional account insurance was available.


Allow banks to decide how much insurance they need to provide to serve their depositors. Allow these banks to purchase additional deposit insurance.

Some banks may decide that the $250,000 base amount is sufficient for their depositors while other banks may, at their own expense, purchase additional deposit insurance. This also matches deposit insurance expense with the users of the insurance rather than apportioning premiums among all insured institutions as is now the FDIC’s practice.


  • Encourage community banks to better compete with large banks by creating an incentive for community banks to create incentives for time deposits. Once upon a time, financial institutions provided demand deposit accounts (checking) and time deposits (savings accounts and CDs). An entire sector of financial institutions developed that provided only time deposits (Savings and Loans and Building Associations). People bought CDs or simply saved because the interest rates available were attractive and provided a risk free return.

A quick Google search showed that today, investors can achieve 4% plus interest rates for relatively short-term CD but over time, the average CD rate has declined precipitously –

average cd rates 1984-2023

Source: Bankrate


Note that in 1984, investors were able to buy CDs with yields over 11%. It’s interesting to note that yield on the S&P 500 in 1984 was -5.9%. That’s negative 5.9%.

Let’s step back and look at that in real dollars. $1,000 invested in a CD earned about $110 while the same amount invested in the S&P 500 lost about $60. This makes a strong risk-free return look quite attractive.

By 2009, CD yields fell below 1% and yields virtually evaporated in late 2021 with banks paying .09% for a 6 month CD. Let’s put that in real dollars: $1,000 invested in a CD earned the investor 90 cents Yes, 90 cents. This seems like a disincentive to invest in a risk-free time deposit when the S&P 500 yielded about 13% that year. Clearly, investors were not motivated by the risk-free almost zero interest rates provided by bank time deposits. For over ten years, CD yields were not comparable with yields of other investments.

We suggest that the Treasury provide a credit facility available only to community banks that would allow the banks to offer a minimum 5% time deposit with at least a 100 basis point return. As interest rates float up, banks would not need to activate the facility as their return would be sufficient to encourage banks to offer attractive time deposit rates.

How could this work? Through a repurchase agreement. The US Treasury sells a treasury instrument to community banks with a remaining term approximately equal to the term of CDs sold. Contemporaneously, Treasury enters into a repurchase agreement with the community bank to repurchase the instrument in the future for an amount that would provide the bank with a 100-basis point return for the term of the CD.

This approach is consistent with the Treasury’s current moves to reduce the supply of money through Quantitative Tightening.

While 100 basis points would not provide a windfall return for the banks, it would provide a profit for community banks and a minimum 5% return might encourage investors to fly from at-risk investments to risk free investments at banks.

Offering competitive rate time deposit options to consumers might cure another national problem. It might help the 10% of Americans with no savings and the additional 39% of Americans who report that their savings balances are less than they were one year ago begin or return to saving.


no emergency savings

Source: Bankrate


This solution might get America saving again.

silicon valley bank


By | Article, Insights

Tune in to the audio version of the article:


The Silicon Valley Bank Failure

In “THE SILICON VALLEY BANK SAGA PART 1: WHAT HAPPENED? BY THE NUMBERS” we searched behind the popular press pronouncements to explore elements of Silicon Bank’s risky investment in long term treasury instruments and how these investments eventually contributed to the failure of the Bank.


Banking is Packed with Inherent Risks

Banks constantly face a variety of risks in the ordinary course of their business: in receiving deposits and originating loans or investing deposits for a return in excess of the cost of the deposits. The Office of the Comptroller of the Currency (OCC) has identified nine categories of risks banks face: Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation.

Each day, Bankers must navigate this complex, shifting mine field of risks any one of which may be sufficient to sink the Bank.

As recently demonstrated by the Silicon Valley Bank failure, interest rate risk alone may be sufficient to cripple and eventually destroy a bank. In SVB’s failure, the sixteenth largest bank in the United States was unable to fend off a full-fledged bank run. It succumbed to a tsunami of withdrawals in only a matter of a few days.

The Bank’s end was swift and sure.


Who’s Responsible for Addressing Interest Rate Risk?

The short answer is: everyone in banking governance and management is responsible.

In a 2010 document “Advisory on Interest Rate Risk Management”, the FDIC sets out general standards for IRR management. Numerous subsequent pronouncements by each regulator reinforce the general framework expressed in this Advisory.

The Advisory admits the interest rate risks banks and bankers face ”The regulators recognize that some degree of IRR is inherent in the business of banking.”

Responsibility is then heaped on the Board of Directors –

“Existing interagency and international guidance identifies the board of directors as having the ultimate responsibility for the risks undertaken by an institution – including IRR.” (Emphasis added)

Senior management then gets its share of responsibility –

“Senior management is responsible for ensuring that board-approved strategies, policies, and procedures for managing IRR are appropriately executed within the designated lines of authority and responsibility.” (Emphasis added)

If you are reading this post, you likely have responsibility for conquering interest rate risk at your institution. Ominously, the penultimate paragraph contains an admonition regarding the failure of Directors and Managers to effectively manage IRR –

“Material weaknesses in risk management processes or high levels of IRR exposure relative to capital will require corrective action.”

History will determine the degrees of responsibility of the Board and Managers of Silicon Valley Bank bear in the Bank’s stunning failure.


What’s a Banker To Do?

In a section title “Risk Mitigating Steps” the FDIC provides some general guidance as to tools to manage IRR. Specifically, should IRR exceed or approach the institution’s limits “institutions can mitigate their risk through balance sheet alteration and hedging.”

Bankers should not wait until the risk threshold is in sight (or is behind them) to take action. Proactive balance sheet management helps banks avoid traps like the traps Silicon Valley Bank faced.

The next paragraph describes appropriate hedging activities but no guidance is provided regarding “balance sheet alteration.”

Bankers understand the asset side of the Balance Sheet. Assets revolve around two accounts: Cash and Loans Receivable.

Originating loans can be time consuming. Properly structuring loans may require expertise that is outside the bank’s skill set. Local loan demand may be insufficient to meet the bank’s lending needs. Loan servicing can be expensive and tedious.

Participate solves these problems. By providing a device-independent platform common to both Originators and Participants, participation communication is streamlined. Participation documents can be securely shared, and messages can be exchanged between Originator and Participant from within the Participate platform. The tedious back and forth process of agreeing on terms and executing Participation Agreements is handled with the click of a button. Standardized documents can be e-signed in a quick and seamless workflow.

The old participation slog can be reduced from days or weeks to minutes or hours.

Servicing is simplified. No more maintaining complex, error-ridden, non-audit friendly spreadsheets. Participants can opt-in to receive email and in-platform notifications each time a participation document is uploaded, a payment is disbursed to a participant or a draw and been processed and the participant’s share is requested. Printable forms contain wire instructions allowing them to be used as support for wire transactions by either the originator or the participant. They provide a firm audit trail.

Buying and selling participations allows banks to manage borrower concentrations, manage loan type and geographic concentrations and brings horsepower to the regulatory admonition to “mitigate risk through balance sheet alteration.”

Participate also provides a national marketplace for the purchase and sale of participations greatly expanding the scope of a bank’s contacts.


Talk to BankLabs 501.246.5148 or to discuss how we can help you manage interest rate risk.




By | Article, Insights

Failure Theories Abound

Silicon Valley Bank’s recent failure was capable of generating a systemic contagion that could have crippled economies worldwide. Rapid response by US regulators and monetary authorities avoided this close call, the likes of which may never have occurred in the economic history of the United States.

Fueled by rampant short selling, a plummeting stock price on the NASDAQ exchange and a full-blown bank run (some called it a “Bank Sprint”) driven into a frenzy by social media and instantaneous communication, Silicon Valley Bank spun out-of-control crashing ignominiously on an otherwise quiet Friday in early March 2023.

Financial pundits and financial know-littles had a field day with soundbites about the causes of the Bank’s failure. For example –

  • The Bad Management Theory – SharkTank contestant Kevin O’Leary called the management of SVB “idiots”. It subsequently came to light that companies in which O’Leary is involved had billions deposited at the bank.
  • Political Theory – Florida governor Ron DeSantis, who is expected to run for President in 2022 blamed the Bank’s failure on “WOKE politics”.
  • Off-kilter Cryptocurrency advocate Cointelegraph blamed the Bank’s failure on unnamed regulators’ conspiracy to destroy Cryptocurrency.

While the theories about reasons for the Bank’s failure are uncountable, any banker will tell you “The numbers don’t lie” and the numbers at Silicon Valley Bank foretold the likely implosion of the bank several years before the bank finally failed.


The Bank Grew at Implausible Rates

Founded in 1983, Silicon Valley grew steadily over the years with its “Dedication to Entrepreneurs”. By 2016, Silicon Valley was the 44th largest bank in the US. The bank’s relatively modest growth continued through 2019, however in 2020, the Bank’s growth exploded at eye-popping rates. From 2019 to 2020, the Bank grew from the 37th largest bank to become the 29th largest in assets.

The next year, the bank vaulted over fourteen other banks to become the 15th largest bank in the US.

FDIC Call Reports chart the incredible growth of the Bank. In the 2016-2020 period, assets had grown from $44 Billion to $114 Billion. Likewise deposits lept from $79 Billion to $206 Billion.

Silicon Valley Bank’s explosive growth did not halt there. In 2021, deposits grew 86% from $206 billion to $382 Billion almost doubling in a single year.

Silicon Valley was awash with cash.


Interest Rates Made Long-Term Treasuries Look Appealing

Banks primarily invest deposits in loans. Lending is the primary function of banking. “Excess” cash is often invested in government securities usually of a very short term to avoid interest rate risk and to roughly match the maturities of the securities with expected short term cash needs.

Silicon Valley flipped this formula with catastrophic results.

United States monetary authorities had maintained near zero interest rates for a prolonged period beginning with a precipitous drop in late 2008 in response to the Banking Crisis extending into late 2021.

Interest rates reached their nadir in late 2020 when the bell weather 10 Year Treasury Note fell to .64% –


interest rates graph

Source: Macrotrends

As long-term interest rates were falling, so were short term rates. 26 week T-Bill Coupon Equivalents yields almost vaporized, dropping to .11% during Q3 2020.

While both long and short term interest rates dropped and deposits gushed into Silicon Valley Bank, long term instruments maintained a substantially higher return than short term instruments –


2020-2021 Securities Loan growth

Silicon Valley Bank took the bait and bought long term treasury securities rather than lend the deposits or invest in short term instruments. From 2020 to 2021, securities holdings at SVB increased at a dizzying pace while loans grew at modest rates –

Interest rate increase 2022

Unfortunately for the Bank, interest rates, which had remained flat since early 2020, began to rise. In early 2022 in an effort to curb inflation that was running at 1970s-like rates, the Federal Reserve Bank began a series of seven rate hikes which would raise the Fed Funds Target Rate from almost zero to 4.25% – 4.5% in only nine months –

Interest rates increase 2022 table

Source: Board of Governors of the Federal Reserve System

As a result, a 10-year bond purchased at par in 2020 with a 1% coupon rate for $1 million would have plummeted in value to about $800,000 two years later when yields had risen to 4.5%. Silicon Valley’s massive securities purchases were worth substantially less than face value. And depositors were now withdrawing funds at massive levels.


The Bank Run Begins

While exact withdrawal rates are not available, the press has described the bank run as being driven by social media. Using Google search results as a proxy for interest in the Bank that was translated into withdrawal action by depositors, “Silicon Valley Bank” was a sleepy search term with nominal search activity until March 8 –

Interest over time graph

On March 8 – two days before the Bank failed – searches began to surge. By the day of failure search activity was at its peak –


google trends searches for silicon valley withdrawal

Sources: Google Trends

This proxy indicates that in only three days – the two days before and the day of the closing – the full-blown bank run was in progress. This conclusion is buttressed by news reports citing a single day withdrawal total at $42 Billion, leaving the Bank $1 Billion short of available cash to pay depositors.

To meet the withdrawal deluge, Silicon Valley Bank looked to their now heavily discounted long bond portfolio to meet liquidity demands. Selling at discounted prices would have effectively bankrupted the Bank. Unable to instantly raise equity, Bank management had now run face first into an insurmountable problem: Silicon Valley Bank, days before, the 16th largest bank in the United States was insolvent, had failed and required regulatory intervention to close the bank and end the bleeding.

On Friday, March 10, the California Department of Financial Protection and Innovation closed the Bank and appointed the Federal Deposit Insurance Corporation as the Receiver for Silicon Valley Bank.



What should Silicon Valley Bank have done to better manage the interest rate risk that eventually caused its failure?

Was the Bank’s failure inevitable?

What could Silicon Valley done to manage interest rate risk?



Talk to BankLabs 501.246.5148 or to discuss how we can help you manage participations and interest rate risk.

People with spreadsheets


By | Article, Insights

Tune in to the audio version of the article:


The three primary regulators for US financial institutions – the Office of Comptroller of the Currency (OCC) for national banks, the Federal Deposit Insurance Corporation (FDIC) for community banks, and the National Credit Union Administration (NCUA) for credit unions – have recently promulgated guidance for member financial institutions regarding participation lending. 

Why this apparently recent interest in loan participations, financial vehicles that have existed formally in US banking since the dawn of federal regulation of banking in the 1930s? 

Despite the recent “good times” in US banking, primary regulators found it necessary to provide official guidance to member institutions to protect the safety and soundness of banks and credit unions. 

The reason is simple: risk.  

Let’s look at some high-level summaries of regulatory action with respect to participations. What is the history of participations? What are the risks and why are the regulators so interested in loan participations? 



Bankers that can recall the banking crises of the 1980s may recall that many experts cite loan participations in commercial real estate as a factor that exacerbated the meltdown of numerous banks and thrifts in a contagion-like fashion. The scope of the contagion shook the foundations of the US banking regulatory authority. 

Many of the troubled banks were involved in networks that bought and sold participations among themselves. When loans participated among the troubled banks developed performance issues, all the banks owning participation shares were affected. 

The participation “industry” at the time appeared to suffer from a lack of analysis of the various risk factors that can affect loans, especially credit risk accompanied by governance risk. Due to potential systemic risks in 1984, OCC issued a Circular “Subject: Purchase of Loans in Whole or in Part-Participations” that laid a foundation on which subsequent promulgations were based. 

Inter alia, the Circular identified various participation lending components that should be addressed to maintain safe and sound lending practices for the purchase and sale of participations. These considerations included adequate credit analysis and appropriate levels of transfer of credit information regarding the loan participated. The Circular also referenced recourse agreements between buyers and sellers, a hot issue in the participation market at that time. 

The Circular was rescinded by OCC’s 2020 Bulletin 2020-81 (infra) 



Regulators have developed a better understanding of the effects of relationships among institutions and the potential for systemic risks to the banking system due to these relationships created by participations.  

To provide guidance regarding participation risk, each of these primary regulatory bodies has promulgated guidance to member institutions regarding risks involved in participations. Financial institutions should refer to their regulator’s rules, policies, and guidelines for additional standards for the management of the participation process and associated risks. 

OCC: “Credit Risk: Risk Management of Loan Purchase Activities” 

This OCC Bulletin sets out a simple statement of purpose that permeates all primary regulatory guidance regarding participations: “A bank’s loan purchase activities would typically be handled in a manner consistent with its other lending activities, including sound risk management commensurate with the bank’s size, complexity, and risk profile.”  

An appropriate level of participation risk management would include: 

  • A strategic plan 
  • Addressing risk limits 
  • Setting-out policies and procedures for participation purchases 
  • An analysis of credit administration 

FDIC: “Advisory on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations” 

This 2015 Financial Institution Letter contains a similar purpose statement regarding participations. Institutions should underwrite and administer loan and loan participation purchases as if the loans were originated by the purchasing institution.” 

Member institutions were directed to develop loan policies that address participations, to understand the Participation Agreements they enter into, to perform appropriate due diligence, and to follow appropriate governance standards by obtaining necessary levels of approval before entering into the transaction. 

In separate guidance, the FDIC identified risks specifically relating to participations to include inter alia –  

  • Overreliance on the selling institution 
  • Inability to obtain timely information both in underwriting and loan administration 
  • Poor understanding of loss exposure when the loan underlying the participation is involved in a workout or institution liquidation 
  • Overreliance on recourse provisions contained in participation agreements 

NCUA 2019: “The ABC’s of Loan Participation Due Diligence 

NCUA Rules Section 701.22(b)(5) provides specific requirements for applicable loan participation policies. NCUA summarized the rules regarding the contents of participation agreements. These documents shall include specific information as to the parties and amounts, portions purchased and retained, document custodial location information, and duties and responsibilities of parties to the participation agreement. 



Contact BankLabs today to see how our patented end-to-end platform helps address risk and foster compliance with your participation portfolio. Email us at or call 501.246.5148.