Will the Collapse of SVB Cripple Small Banks?

The recent collapse of Silicon Valley Bank and Signature Bank has resulted in a significant loss of faith in regional and community banks in the US. Panic-stricken depositors have been moving their money to megabanks or money-market funds, causing smaller banks to face an unprecedented decline in deposits. According to "Small Banks Are Losing to Big Banks. Their Customers Are About to Feel It.", an article The Wall Street Journal, "The 25 biggest U.S. banks gained $120 billion in deposits in the days after SVB collapsed, according to Federal Reserve data. All the U.S. banks below that level lost $108 billion over the same period." This situation could have lasting effects on the communities these banks serve and may lead to a credit crunch.

The withdrawal of deposits from small and midsize banks, which have been essential for small-business lending, may adversely affect small-business lending in the future. Reduced deposits may lead to decreased lending, similar to the aftermath of the 2008 financial crisis, when small-business lending never fully recovered.

The 2008 financial crisis saw many small banks struggle, with some ultimately failing or being absorbed by larger institutions. As a result, small-business lending, particularly loans of less than $100,000, became increasingly difficult to obtain. The current situation with smaller banks losing deposits could mirror the 2008 crisis, further stifling small-business lending and affecting local economies.

The future of small banks and their ability to support small businesses and local communities remains uncertain. If the trend of depositors shifting their money to larger banks continues, it could lead to a greater concentration of financial power in the hands of a few large institutions, reducing competition and potentially harming the economy.

The recent deposit loss experienced by small banks in the US may have long-lasting repercussions on communities and small-business lending. Drawing parallels to the 2008 financial crisis, it is essential to monitor and address this situation to ensure the stability and growth of local economies and the overall financial system.