By Jim Smilie
With recent news of the failure of major banks in California and New York, many have wondered if the country is heading toward the same kind of financial crisis seen in 2008.
Blake Chatelain, President of Red River Bank, told members of the Rotary Club of Alexandria Tuesday that he doesn’t believe the current problems will rise to that level. “That’s what everyone is asking — is it going to be like 2008? I don’t think anyone thinks it will be like that,” he said.
Chatelain noted that the 2008 bank failures were driven primarily by sloppy underwriting of loans. “When those loans started to fall apart, we started to see bank failures,” he said.
In the wake of those issues, numerous changes were made to the banking system, including increased regulation and requirements that banks maintain a greater percentage of cash on hand to meet customer demand. “Basically, there was a major effort to take away the ability to use the practices that led to the problems,” Chatelain said.
Overall, Chatelain said the new regulations have lessened the chance of failures. And he stressed that no depositors lost money as a result of the failures in 2008 or in the ones this year. Regarding the most recent bank failures, Chatelain said, “I’m not sure anyone is arguing there was a lack of regulation. But I do think there was a lack of regulatory action.” Looking specifically at the banks that have failed this year, Chatelain explained they all saw rapid growth in very narrow areas, such as crypto currency. “What you see is a lot of heavy growth without the infrastructure buildout that is needed,” he said.
Chatelain noted there has been consolidation in the banking industry in the past decade. Nationally, there has been a 35 percent reduction in the number of banks in the country since the start of 2011. In Louisiana, there has been a 29 percent decrease, going from 156 banks at the end of 2010 to 111 at the start of this year. He estimated half of all deposits in the state are held by out of state banks. In terms of deposits, the top five banks in the state are out of state banks. Red River Bank ranks eighth in size based on deposits at $2.86 billion. JPMorgan Chase is the largest in the state with $25.58 billion, followed by Capital One at $24.80 billion. Total bank deposits nationally are $17.1 trillion, with $10.2 trillion of that held by the top 10 banks.
He noted community banks, like Red River Bank, typically maintain greater capital on hand and are more conservative in their money management than larger national and regional banks. “Not every loan carries the same risk. Not every asset carries the same risk. Home loans, for example, are less risky than a loan for a start-up business,” he said. “The key to running a safe and sound bank is a lot of diversification.”
In addition to the rapid growth of crypto currency, Chatelain said the overall economy has affected the financial and banking industry. “We have been in a low-rate environment since 2008,” he said, noting the rates were held below what the market would normally see as part of national fiscal policy. Interest rates were expected to start a gradual increase in 2020, but when the COVID-19 pandemic triggered the shutdown of businesses, rather than edging up rates were cut to zero.
Once the pandemic ended, regulators rapidly increased interest rates. “After 14 years of low rates, we went from 0 to 5 percent,” Chatelain said, calling it an unprecedented jump. “That’s extreme volatility. And when you get into that kind of volatility, things break,” he said.
Looking ahead, Chatelain sees an uncertain future. “I think it’s a pretty murky picture. My crystal ball is very cloudy,” he said. Looking at current trends, typically long-term bonds yield a higher rate of return than short-term bonds. Currently, the reverse is true, resulting in an inverted yield curve, Chatelain explained. That reflects that forecasters expect the economy to slow down. Historically, he said, recessions often occur when the yield curve is inverted for 10-12 months. “The curve has been inverted now for about 10 months,” Chatelain noted.
While he expects inflation will continue to decrease, Chatelain believes the rising national debt is an issue that has to be resolved. “I think right now each one of you owes around $250,000 toward the debt,” he said. “It’s on an unsustainable path.”
He also expects there will be tighter scrutiny and enforcement of banking regulations. “Regulators didn’t act as much as they should have,” Chatelain said regarding the current bank failures. “I expect they will over-correct.”
Finally, Chatelain acknowledged that cybersecurity is a significant focus for banks of all sizes. “That’s something you never solve, it’s a constant effort,” he said. “In the old days, the person who sits in my chair could be sort of a jack of all trades. Today, you have to have specialists to manage things. It turns out, the days we only had to worry about bank robbers were the easy days.”