Park State President Outlines What Went Wrong with SVB and Preventive Steps Taken
The national financial and banking industry recently received a jolt when the California-based Silicon Valley Bank (SVB) was shut down by the state’s department of Financial Protection and Innovation.
Theories abound regarding the cause of this unprecedented failure. But most experts say that the bank’s collapse was caused by a number of factors, including the value of their investments greatly decreasing and their depositors withdrawing large amounts of money in a short period of time.
After the collapse hit national news, people across the country feared that more banks would fold for similar reasons. Many (including Teller County residents) questioned whether their money deposited in local banks would be safe.
Shortly after SVB folded, the president of Woodland Park’s Park State & Trust Bank, Tony Perry posted a letter on his website reassuring his customers that their investments in the local bank were safe. “As a community bank, Park State Bank & Trust remains well-capitalized and stronger than we have ever been, serving you and our community since 1965,” the bank president said in the letter shortly after the SVB incident.
This reassurance is important for the local financial and real estate industries, as the majority of residents do business with Park State.
Still, the Park State president cites some tough head waters for financial institutions due to the current market.
Perry said that there are some factors that have made it tough for banks recently, like the Federal Reserve raising the interest rates rapidly to combat the recent high levels of inflation.
“They rose these rates in one year and it was unprecedented,” Perry said. “What happens then is even if you are in a conservative investment, because they are bonds, if the rates go up and you are invested in that bond your yield goes down. So theoretically, if we went to sell that bond in the market we are going to get less. We are going to get a loss on it. When most community banks buy those, we have no intention of selling them. Every bank in the country that had some bonds backed by the government will probably have an unrealized loss on their balance sheet. As long as the bank is managed well and knows what they are doing, they are not going to sell those any time soon.”
Criminal Behavior Questioned
Perry said that the problem with SVB started with their business plan of taking large amounts of money and making risky investments. They had a large amount of customers that had deposits over the $250,000, the amount insured by the FDIC.
When the rates started rising and SVB was experiencing unrealized losses it started to put pressure on their liquidity or the amount of cash they have on hand to meet short term obligations. Perry said that the primary problem with SVB was a series of decisions made by its management.
“The management team sold their stock three days before they got shut down, to me that’s criminal,” Perry explained. “Secondly, probably someone in their management team if not their CEO, tipped off some of their billionaire friends, so everyone came in and started getting their money out, which created the run and the problem. They thought it was a good strategy to sell those treasuries and MBS’s (mortgage backed-securities) at a loss. But no, they should have held them and found other facilities to back their liquidity. They could have done that. Their banking board only had one person on it that had any sort of bank oversight experience.”
The local bank president said that SVB’s management didn’t have a strategy to handle adversity and they were not prepared. He also said that the regulators should not have allowed the bank to operate at such high levels of risk.
Safeguards Made by Park State Bank & Trust
Perry said that Park State Bank has 10 members on their board of directors and they each have several years of experience in bank oversight. He said that Park State Bank purposely operates at a much higher level of liquidity then most banks, especially larger ones that do business in multiple states.
“Most banks try to keep their liquidity down because they want to put it in loans and investments,” Perry said. “Our liquidity at the end of the year was 38 percent. A lot of banks like to target 10 percent or less, but we decided to be safe and have that liquidity and maybe not earn much money on it versus over investing to where we are in trouble and we are sweating. Every bank could come under pressure due to forces we can’t control.”
He explained that Park State’s majority shareholders consist of members of a family that has been in the banking industry since the 1870s. The shareholders do not put pressure on the board or management to generate income at all expense, which allows the bank to run high liquidity levels.
“Their mantra is yes we want you to grow income and be smart and do good business, but we also want to be safe and sound,” Perry said of Park State’s majority owners. “And if we are trying to balance it, we are going to tip towards safety and soundness first. For instance, us carrying 38 percent liquidity at the end of the year is not the best strategy for maximizing income. It’s the best strategy for hedging against risk, which is going to serve us well over the next nine months or so as we navigate the current environment. And I would say we have 18 months of this stuff coming up. I think this year is going to get rougher before it gets better. Maybe in 2024, we will start seeing signs of coming out of this current economic situation.”
He also said that many smaller community and regional banks operate at lower levels of risk than bigger banks like SVB.