Bank failures unlikely to have significant industry effect in Arkansas

Arkansas banking leaders have been working to reassure consumers and renew confidence in the industry’s strength in the state and nationwide after two large coastal banks failed in mid-March.

Sam Sicard, president and CEO of the First National Bank of Fort Smith, doesn’t expect severe impacts on the Arkansas banking industry after the failure of Silicon Valley Bank of Santa Clara, Calif., and New York-based Signature Bank.

According to the Federal Deposit Insurance Corp. (FDIC), the two failed banks had combined assets of $319.4 billion. Collectively, 83 Arkansas banks’ total assets were $158.2 billion as of Dec. 31. According to Bankrate.com, the September 2008 failure of Washington Mutual Bank, with $307 billion in assets, was the largest U.S. bank to fail. Silicon Valley Bank and Signature Bank comprised the second and third largest failures, respectively.

Sicard, CEO of Fort Smith-based First Bank Corp. — the holding company for First National Bank of Fort Smith, First National Bank of NWA and Citizens Bank and Trust in Van Buren — said he couldn’t speak for all Arkansas banks. Still, most are in good condition financially, are profitable, and have a stable deposit base and plenty of capital.

“If there are not quite a few other bank failures, I’m fairly hopeful and optimistic that it’s not going to be too big of an event for us,” he said.

The recent bank failures have yet to impact the company significantly, Sicard said, adding that the effect has been minimal on its financial statements and deposit base. Also, the bank has not seen any credit downgrades and attributed that to the state’s economic strength.

“Arkansas’ economy is still pretty solid,” he said. “We’re at a record low unemployment rate and have job increases. Housing affordability is a bit of a challenge for consumers, but for the most part, the housing and real estate markets are not that distressed.”

In a recent interview with Talk Business & Politics CEO Roby Brock, Arkansas State Bank Commissioner Susannah Marshall discussed the industry’s strength in the wake of the high-profile bank failures.

“The danger of those two failures on the industry as a whole and at the national level puts out a sense and feel of panic, concern, instability, anxiety within our business sector, within the banking sector,” Marshall said. “But quite frankly, we are at one of the strongest business cycles in many years. So those failures certainly are going to create angst or concern. I think it’s very important for us at the local level and at the national level to ensure to the public that we have a strong and stable banking sector and a strong and stable financial system. Our job is to ensure the safety and soundness of that financial system.”

REASSURING CUSTOMERS
Sicard said bank employees have received customer questions on FDIC insurance limits, the bank’s financial condition and the industry. He welcomed the customer questions as they provided an opportunity to strengthen relationships and to communicate with and reassure them.

“Customers should feel reassured,” he said. “There’s nothing wrong with calling your local banker and asking questions. Based on what I know, I believe that Arkansas customers have very little to worry about.”

Customers are learning how to receive additional deposit insurance coverage without an added cost. He said some customers with more than $250,000 in deposits are looking to move funds to sister bank Citizens Bank and Trust to take advantage of additional coverage. Customers also can expand coverage by adding a spouse or child to their account, each of whom would provide an additional $250,000 in coverage.

PREMIUMS MAY INCREASE
Sicard was still determining how banks might be responsible for replenishing the deposit insurance fund (DIF) to cover the losses from the recent bank failures. He said all banks pay into the fund based on their deposits but have yet to see premiums increase; however, they might rise to replenish the fund.

“The money has to come from somewhere to replenish that fund,” he explained. “I’m hopeful that since clearly, this isn’t a community bank issue, that community banks aren’t detrimentally impacted from the systemic risk that large banks have that the regulators, the Federal Reserve, Treasury Secretary (Janet) Yellen and … the FDIC view needing them to have to step in and cover all of their depositors, even the one’s that weren’t even covered.”

Nearly 90% of the deposits of the failed banks exceeded the $250,000 insurance threshold, but those above the limit are expected to be covered. Sicard said the justification for covering deposits exceeding the limitation was that the banks’ failure and losses to depositors would create “a systemic risk to the financial system.”

Recently, Sicard spoke to U.S. Rep. French Hill, R-Little Rock, and advocated for legislation to require larger banks “that enjoy this implied systemic risk coverage of unlimited insurance coverage for their depositors to pay an additional systemic risk premium into the insurance fund. I’m hopeful that there will be legislation that comes out that does not detrimentally impact community banks in Arkansas, which the vast majority of banks in Arkansas are community banks – small regional banks.”

FEDS FACE FAILURES
In a recent Senate committee meeting, FDIC Chairman Martin Gruenberg addressed the bank failures, the subsequent sale of the banks placed into FDIC receivership and how the deposit insurance fund would be replenished because of the uninsured deposit insurance coverage. Despite recent events, he said the U.S. financial system “remains sound” and that in May, the FDIC will seek public comment on proposed rulemaking for “a special assessment” that banks will pay to replenish the deposit insurance fund.

According to the FDIC, the estimated loss to the fund for the combined bank failures will be $22.5 billion. Of that amount, about $19.6 billion was attributed to the cost of covering the uninsured deposits at both banks.

“I would emphasize that these estimates are subject to significant uncertainty and are likely to change, depending on the ultimate value realized from each receivership,” Gruenberg said.

Arkansas federal legislators in financial committee leadership roles also recently addressed the failures. Hill, who’s vice chairman of the House Financial Services Committee, and committee chairman Rep. Patrick McHenry, R-Denver, N.C., recently sent letters to Gruenberg and Yellen seeking answers to a bevy of questions and requests related to the President Joe Biden administration’s responses to the failures, including the decision to invoke the emergency systemic risk exception.

Meanwhile, U.S. Rep. Steve Womack, R-Rogers, chairman of the House Subcommittee on Financial Services and General Government, noted the bank failures in recent comments to Yellen and Shalanda Young, director of the Office of Management and Budget, during a subcommittee meeting on the administration’s fiscal 2024 budget request and U.S. economic outlook.

“I would be remiss if I did not mention something that’s also on every American’s mind, the current banking crisis and how American taxpayers are on the hook for it,” Womack said. “Whether through fees passed on by the banks Americans rely on or taxpayer-funded backstops, I ask you today to be frank with us about the real impact.”