By Dave Ongie, Managing Editor
Earlier this year, the collapse of Silicon Valley Bank sent shockwaves through the financial industry.
According to Colin Barrett, President and CEO of the Tennessee Bankers Association, the collapse wasn’t notable simply because it was the second largest bank failure in U.S. history. Instead, it was the fact that Silicon Valley bank was a 40-year-old, well-capitalized institution that failed largely because of hysteria magnified by social media.
“What happened to Silicon Valley Bank, it was a straight-up bank run,” Barrett told the Business Journal during a recent visit to Kingsport. “That bank would have been fine, but it got on social media, and those deposits were pulled.
“I think we’re entering this new period of time that is concerning.”
With that being said, Barrett is confident that the state of banking – particularly in Tennessee – is on solid footing. Banks across the board are well-capitalized, and lending remains strong despite the fact that interest rates have risen dramatically over the past two years in an effort to control inflation. But the new landscape in the wake of the COVID-19 pandemic and fiscal priorities at the federal level has certainly created some new challenges.
The Battle for Deposits
The stimulus money that left banks flush with cash just two years ago is now long gone, leaving banks competing for deposits. What’s more, the competition for capital is stiffer than it has ever been.
“Everybody is competing heavily for deposits because a lot of them are gone and rates are high,” Barrett said. “I think it was just widely assumed we were going to see kind of a crash, and the fears of that, I think they’ve abated a bit. Banks are competing for deposits, but not necessarily against each other. It’s the treasuries and the Edwards Jones of the world. That’s where a lot of that money is going, and we haven’t seen that really before.”
Despite a spike in interest rates, Barrett said that lending has not slowed down all that much. As a result, having cash on hand is vital in order to meet the lending demands.
“I think everyone is surprised that loan demand has stayed at the level that it’s stayed at considering rates are increasing,” he said. “I still think it’s early in the re-fi cycle, so those rates haven’t totally reset. I think there is still probably some pain to be felt there, but lending hasn’t slowed. It’s slowed some, but not as much as we would have expected.”
Interest Rates Level Out
When inflation began to run rampant and the Federal Reserve responded with a series of steep interest rate hikes, fears of a slowing economy materialized quickly. But a funny thing happened on the way to a recession – the economy simply refused to slow down.
So what does that mean for the future?
“We’re about at the peak and then it’s going to level out,” Barrett said. “I think for a long time there was a thought that we would get there, the economy would really suffer and there would be a drop, but because of the way it’s playing out, we’re kind of expecting rates will stay around this level probably until 2025.
“I don’t think you’re going to see (interest rates) drop. It felt like for a while they were building it up to bring it down when everything cools, but now since it hasn’t shaken the economy, I think you’re going to continue to see the rates stay around that level.”
The Prospect of a ‘Digital Dollar’
The idea of a digital currency backed by the central bank has picked up a lot of momentum, and Barrett said that is a major concern for those in the banking industry. He pointed out that FedNow is already capable of processing instant transactions, making the need for digital currency questionable.
“I understand why China does it,” Barrett said. “They want to spy on their people. But we don’t have a need for it. We do have instant settlements. We don’t have a need for a digital dollar.”
Privacy issues are certainly paramount, but the role of private banks could also be jeopardized if a digital dollar comes into existence.
“There are a lot of concern if you did have a digital dollar, would that pull deposits away from banks which make loans,” Barrett added. “We’re running into a lot of privacy issues as a country. The government doesn’t need to have control. You don’t need to get social credits based on if you’re using green energy.”
Barrett also said the state legislator could pass legislation this upcoming year that would prohibit the state of Tennessee from using a central bank digital currency. “There’s a lot of concern about that at the state level,” he said. “The decentralization of money is a scary topic.”
The Federal Government’s Impact on Banking
Any time a new administration enters the White House, the banking industry faces changes based on the policies the new administration enacts. The transition from the Trump administration to the Biden administration obviously created some drastic policy changes, and one in particular has affected the banking industry.
“I think the major change is this administration is very interested in climate policy and the roles banks play,” Barrett said. “We don’t know exactly what that’s going to end up looking like, but they’re determined to solve the climate problem through the banking industry, which is crazy.”
Barrett said the Consumer Financial Protection Bureau – a unit of the Federal Reserve System – finalized a rule this past spring aimed at increasing transparency in small business lending, and he sees it as a violation of privacy. The CFPB will require banks to use 81 data points to collect data on small businesses, and Barrett said the banking industry is pushing back on that.
“Depending on what is done with that information, you can figure out what this small business does,” he said. “The government is collecting so much information, and unlike the banks, which are required to keep that information safe, the Federal Government isn’t. They don’t report to anybody and aren’t overseen by anybody. I think the collection of information of private individuals is scary, and they’re looking into climate policy.”
Additionally, Barrett believes the Silicon Valley Bank failure will ultimately lead to the federal government raising capital requirements for all banks despite the fact that SVB and a handful of other banks that have failed recently were well-capitalized.
“They’re going to end up putting in higher capital requirements,” he said. “When you put in higher capital requirements, you’re basically reducing the amount of lending. Banks are how you get out of recessions, and if you layer on additional capital requirements, it will make it harder for this economy to get out of a recession if that’s what we end up in.”
AI: Friend or Foe?
As Artificial Intelligence continues its rapid evolution, Barrett has no doubt it will play a prominent role in the future of banking. Right now it is presenting more concerns than opportunities.
“I worry about it on the fraud side,” he said. “We run this country reactively, not proactively, so something bad will have to happen before something gets done about it. Right now, it is advancing so much faster than Washington understands. It will have to be regulated at some point.”
In the future, however, Barrett sees the potential of AI to enhance the customer service experience and add efficiencies to the banking industry.
“I don’t think we’ve really seen its capability in the banking system,” he said. “I think it will be a useful tool in the future.”
