April 4, 2023
Greenleaf Trust the Bank
There are a lot of headlines out there questioning the safety and liquidity of our banking system after the recent failures of Silicon Valley Bank and Signature Bank. Time and details have hopefully abated those concerns and revealed that the failures of these banks were company-specific incidents due to poor management rather than an indicator of systemic banking risks.
How did it happen? To best answer that question, it’s helpful first to understand the basic banking model. Banks take money in as deposits and pay the depositors a nominal rate of return. They then lend most of those deposits out to borrowers at a higher rate. The bank collects the spread between the rates. They do, however, still need to keep some of those deposits at the bank in case customers want to make a withdrawal. We call these capital reserves and bank examiners monitor this. Usually, banks keep their capital reserves invested in liquid shorter-term US Treasury Bonds in case they need it to accommodate withdrawals.
In the case of Silicon Valley Bank, there were more than a few company-specific issues that led to their downfall. They start with a concentrated customer base consisting primarily of smaller technology and venture capital companies. As inflation rose last summer, it became more and more expensive for these smaller technology companies to conduct their business. With limited earnings, they subsequently needed to go to their bank deposit accounts and make withdrawals to pay their bills. Here is where management’s decisions on how their capital reserves were invested became an issue. Instead of shorter-term US Treasuries, Silicon Valley Bank invested their capital reserves primarily in more interest rate sensitive, longer term US Treasuries and mortgage-backed securities. Bond prices move inversely to interest rates. Thus, as the Federal Reserve raised interest rates rapidly over the last twelve months to fight inflation, the market value of the bank’s capital reserves was reduced significantly, and they couldn’t keep up with the withdrawals that were being requested. Those withdrawals then hit a frenzy when the publicly traded bank went out to capital markets to issue more equity shares in an effort to raise money to keep up with current withdrawal requests. The result was essentially a run on the bank like the one in It’s a Wonderful Life, and the bank could not meet its obligations.
So, could this ever happen at Greenleaf Trust? The answer is no. We are a state of Michigan chartered bank; however, we exercise only our trust powers and do not have the ability to engage in deposit or lending activities. As a Michigan chartered bank, we are regulated by Michigan’s Department of Insurance and Financial Services (DIFS). The DIFS conducts a Safety and Soundness Exam on Greenleaf Trust every 18 months. In addition, we have a third-party auditor conduct examinations on the bank annually. Even though we do not accept deposits, the state of Michigan requires us to maintain capital reserves. Our capital reserves are in excess of the amount mandated and are retained corporate earnings, not client assets. Our capital reserves are invested in shorter-term US Treasuries. Finally, we are not a publicly traded company with management beholden to a “shareholders first” philosophy. Our vision has always been and will always be clients first, teammates second, and shareholders last.