Regional Banks and Regulators Try to Soothe Depositors’ Fears

In the panic after Silicon Valley Bank collapsed in early March, some small and medium-size businesses yanked their money from regional banks and deposited it with the biggest ones, seeking the security of their gigantic balance sheets and the government’s implicit backstop of lenders deemed too big to fail.

Regulators, bank executives and industry representatives have been trying desperately to persuade those depositors to stop.

On Tuesday, Treasury Secretary Janet L. Yellen expressed confidence in the nation’s banks and suggested that the government would step in to protect smaller banks if needed. Shares of many regional banks rallied after her remarks.

Last week, Tim Mayopoulos, the new chief executive of Silicon Valley Bank, implored clients to leave their deposits with the bank or transfer them back. And some lawmakers in Washington are seeking to raise the limit for federal deposit insurance above $250,000 so that businesses don’t fret about losing their uninsured funds if their bank fails.

But fear persists.

More than 90 clients of Kruze Consulting, an accounting firm that specializes in start-ups, have changed banks in the last few weeks — and half went to JPMorgan Chase, said Scott Orn, the firm’s chief operating officer.

“As things started getting scarier and the regional banks’ stock prices started getting hit, it became clear that the only place you’re totally safe is the too-big-to-fail banks,” Mr. Orn said. “It’s the prisoner’s dilemma everyone has been talking about.”

That worry is at odds with the optimistic messages from regulators and bankers that the crisis may be abating, and underscores the uncertainty that continues to stress the banking system.

Eric Peters, the founder of One River Asset Management in Greenwich, Conn., wrote on Monday of his decision to shift some of his investment advisory firm’s cash from a bank in Santa Barbara, Calif., to a too-big-to-fail giant.

“We’re exposed to the credit risk of our commercial bank, but we’re not being compensated in any way for it,” Mr. Peters said in an interview. “As a rule, I don’t like to take a lot of risk and not get paid for it.”

None of the Big Four banks — Bank of America, Citibank, JPMorgan and Wells Fargo — have commented publicly on how much new cash has flowed into their coffers, but bank officials familiar with their operations acknowledged that they had gained some of the deposits leaving Silicon Valley Bank and other regional banks.

Those shifts are hard to track in real time; banks disclose their deposits and assets in quarterly regulatory filings. Some, though, have clearly suffered a hemorrhage: In a Monday note, Morgan Stanley analysts estimated that First Republic, a San Francisco lender, lost $86 billion in deposits, or about 72 percent of its total uninsured deposits, between Silicon Valley Bank’s collapse and last Wednesday. (Late last week, 11 of the country’s biggest banks said they would lend First Republic $30 billion.)

Executives of small and regional banks — typically considered those with up to $50 billion or so in assets — appeared to be divided on the toll the crisis has taken on their finances.

In Washington on Tuesday, those at a previously scheduled meeting of the largest bank lobbying group, the American Bankers Association, sought to show that the panic was subsiding.

“Things are calming down in the market,” said A. Scott Anderson, the chief executive of the Utah-based Zions Bank, which has $90 billion in assets.

Mr. Anderson and three chief executives of smaller banks, who appeared together on a panel in a session called “The View From Main Street,” each said they were not seeing deposits being pulled from their banks.

But one member of the audience — the chief executive of a bank with around $60 billion in assets — described some outflows of deposits, largely pulled by nonprofit organizations and businesses too small to have a full-time chief financial officer.

The person, who did not want to be identified because naming the bank risked causing more withdrawals, helped draft a letter that Brent Tjarks, a lobbyist for midsize banks, sent to regulators on Friday, seeking unlimited deposit insurance for all banks.

The person said the main goal of the letter was to level the playing field. The “too big to fail” label had suddenly made the largest banks appealing destinations for smaller companies’ funds, while some depositors now view midsize banks as too risky to trust, the person said.

Last week, Mr. Mayopoulos sent Silicon Valley Bank clients a note: “If you, your portfolio companies or your firm moved funds within the past week, please consider moving some of them back as part of a secure deposit diversification strategy.” He added that the bank was “actively opening new accounts of all sizes and making new loans.”

Other bankers, however, said they were not seeing widespread anxiety from customers.

Camden Fine, a former president of the Independent Community Bankers of America, said that after Silicon Valley Bank failed, he had begun calling bankers he knew to check in.

“I probably spoke to at least three dozen community bank C.E.O.s from all parts of the country, probably banks ranging from $500 million in assets all the way up to $10 billion in assets,” Mr. Fine said. “Without exception, every single one of them said: ‘We are seeing deposit inflows to our banks. We’re actually gaining deposits.’ They were baffled by all this talk about deposits are fleeing smaller and regional banks and going to the megabanks.”

To keep cash at risk of leaving, some bankers are steering clients to products that reduce their unprotected deposits. One popular option is often referred to as an “insured cash sweep” — a service that breaks large deposits up into chunks and farms them out to multiple banks.

Nearly 3,000 financial institutions, mostly community and regional banks, participate in a network operated by IntraFi Network, a company in Arlington, Va. Founded 20 years ago, IntraFi runs a service that lets banks make “reciprocal deposit” swaps. A customer can, for example, deposit $10 million in a local bank, which can then use IntraFi’s network to parcel the deposit out to other institutions in amounts below $250,000. That ensures that the money is fully covered by the Federal Deposit Insurance Corporation’s guarantee.

Jill Castilla, the chief executive of Citizens Bank of Edmond, a small community lender in Oklahoma, promotes IntraFi to her customers as a way to keep their cash local and supporting their community. That has helped calm nerves in recent days, she said.

“We talk about this option with every large depositor,” Ms. Castilla said. “It’s a very easy network to access, it doesn’t cost them anything, and it gives them more assurance.”

Pacific West Bank, one of the regional banks whose stock has been hammered, dangled IntraFi’s service on Tuesday as a lure for nervous customers. “Looking for a new banking partner? We are a one-stop solution,” the bank posted on Twitter, promoting its ability to use the service to protect deposits of up to $125 million.

Since March 13, IntraFi’s transaction volume has risen 15 percent, said Mark Jacobsen, the company’s chief executive and a founder. The typical deposit through the network is $3.1 million.

Some customers are trying to balance a desire to safeguard their cash with their loyalty to banks that they want to remain in business. Maya Mikhailov, the founder of Savvi AI, a venture-backed technology start-up in Chicago, is sticking with First Republic as her company’s primary bank — though she has recently moved more cash into an account at UBS, the giant Swiss bank.

“We’re not going to be naïve — we’ve going to diversify because it’s our obligation as leaders to keep the business solvent and operational — but we didn’t flee all our money to another bank,” Ms. Mikhailov said. “Regional banks are vital to businesses, and it removes choice from the market when these banks are put under pressure."

Ms. Mikhailov said the current crisis felt like déjà vu: She created her first start-up, a mobile shopping technology developer, in 2007, just as the mortgage crisis catalyzed the Great Recession.

“That really opened our eyes to way these things can happen to anyone, anywhere, quite suddenly,” she said. “I think the fear and panic happening right now in the market is really unfortunate, because it builds upon itself.”

Mr. Orn of Kruze Consulting said it would take at least a few more weeks to know where customers landed. Some are opening accounts at big banks as a safeguard, but may eventually migrate to a small, more business-friendly bank for their continuing needs, he said.

But some companies burned by recent explosions are simply moving into the biggest fortress they can find. On Monday, customers of Smartsheet, a business collaboration software maker with annual sales of just over $750 million, received a note directing them to stop making payments to the company’s account at Silicon Valley Bank.

Smartsheet had “migrated its banking relationship,” the note said, and would now be doing business at Bank of America.

Emily Flitter contributed reporting.

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