“Utah is the best place in the U.S. to operate a bank and as a result, Utah is the sixth largest banking state in the U.S.” says Howard Headlee, president of the Utah Bankers Association. Regarding the recent failure of Silicon Valley Bank (SVB) and Signature Bank (SB) and its relevance to Utah banks, he says that “everything we know and have learned tell us that the circumstances leading to the closure of these banks were very unique and bear little relationship to banks in Utah.”

In other words, Utahns with funds in local banks have little reason to fear that those banks will follow SVB and SB into insolvency. Their money is secure.

Among the reasons that SVB failed, panic is high on the list for Headlee. “The fundamental answer is fear. Silicon Valley Bank had unique risks that it didn’t manage particularly well,” Headlee says. “What made this mismanagement fatal to the bank was the poor reaction of a handful of very wealthy, very smart individuals that controlled a significant portion of the bank’s deposits. When they decided to pull their money out of the bank, they killed the bank.”

Despite the reasonable explanation for SVB’s failure – grounded in the fear that is part of human nature – Headlee says that “there are those attempting to use this series of events to promote their preferred narrative in hopes of pushing a particular policy outcome,” such as increased regulation on banks. However, as Headlee puts it, “these bank failures highlight what remains as the most challenging risk to regulate – the panic that drives a run on the bank.” Any additional banking regulation coming from these recent bank failures may prove futile in preventing similar bank failures in the future.

But that doesn’t mean that there are no helpful reforms to be considered. In Headlee’s view, “It may be that in today’s social media environment with revenue-driven cable news and easy-to-use electronic and mobile banking, we are going to need to revise the FDIC insurance system to provide more comfort and assurance [to depositors].” As policymakers move forward in debating the meaning and implications of the recent struggles in the banking industry, we would do well to heed Headlee’s wise words regarding fear and bank failures, along with his suggestion to consider things like our bank insurance system rather than new banking regulation.

You can read the entire Q&A between Headlee and Sutherland Vice President of Policy Derek Monson below.

Derek Monson: What do the failures of Silicon Valley Bank and Signature Bank mean for average Utahns with money in Utah banks?

Howard Headlee: Not a lot. Everything we know and have learned tell us that the circumstances leading to the closure of these banks were very unique and bear little relationship to banks in Utah. For example, Silicon Valley Bank’s customer base was primarily made up of tech companies with large deposit balances, well above the deposit insurance limit (93% uninsured). Many of these customers were early stage, not yet profitable, and relied on regular infusions of venture capital. This created unique risks for SVB that they appeared to not have managed well.

Most importantly, the fact that a handful of VCs had significant influence over a large portion of the bank’s deposits created an enormous risk for the bank. I can’t think of any bank in Utah (or the U.S.) with such a unique business model. Utah is the best place in the U.S. to operate a bank and as a result, Utah is the sixth largest banking state in the U.S. Utah’s banks currently boast historically high levels of capital, liquidity and credit quality, which is consistent with the economic strength of Utah as a state.

Monson: In your assessment, what are the reason for these bank failures? Were they a failure of capitalism, a failure of government regulation, or something else?

Headlee: The fundamental answer is fear. Silicon Valley Bank had unique risks that it didn’t manage particularly well. They knew their deposit base was volatile, yet their portfolio of very safe investments was weighted too heavily in longer term securities. Of all the banks in the nation, they should have managed that interest rate risk differently.

Of course, their unique situation was exacerbated by the speed with which the FED has had to raise interest rates to control inflation as a result of irresponsible federal spending. But in hindsight, the regulators on the ground in San Francisco should have easily identified the concentration risk and the interest rate risks.

Nonetheless, what made this mismanagement fatal to the bank was the poor reaction of a handful of very wealthy, very smart individuals that controlled a significant portion of the bank’s deposits. When they decided to pull their money out of the bank, they killed the bank.

Monson: How would you rate the federal response to the failure of these banks?

Headlee: Federal government tends to overreact to fear because the agencies know that confidence is critical in market-based economies. The risk of underreacting is far greater than the risk of overreacting. SVB is a perfect example.

SVB’s assets (loans and securities) were fine. Once the equity holders were wiped out, there would likely be more than enough assets to cover all the liabilities (deposits). Utah’s banks knew this and stood at the ready to extend credit lines to all the Utah tech companies that were customers of SVB so they could maintain operations until the FDIC liquidated the assets and repaid their deposits. It’s important to remember that the $250,000 deposit guarantee is a floor – once the assets are liquidated, most depositors get back a much higher percentage of their uninsured deposits.

After looking at SVB’s assets, the FDIC decided their liquidation would likely cover 100% of the uninsured amounts, so they guaranteed all the deposits. This episode has spurred a discussion about how we can make FDIC insurance easier to understand and implement. Additionally, the FED created a lending facility aimed at addressing the interest rate risk issues that had initially spooked the SVB and Signature depositors. This program will allow banks to borrow against securities instead of selling them at a loss.

This seems like a reasonable response to the interest rate risk that the federal government has created through inflationary fiscal policy. Nonetheless, most banks already had a plan in place to navigate this risk, so it is not expected to be highly utilized.

Monson: What does the federal response mean for the future of federal oversight of banks, and for the future behavior of banks regarding the risks they are willing to take on?

Headlee: Of course, there are those attempting to use this series of events to promote their preferred narrative in hopes of pushing a particular policy outcome. The idea that the SVB or Signature failures were the result of regulations, or the changes made to Dodd-Frank, were completely refuted by the co-sponsor of the legislation, former Congressman Barney Frank, who was also a board member of Signature Bank.

But that won’t prevent some in Washington, D.C., from promoting more regulations and more programs in an attempt to consolidate more power into the Beltway. In reality, there will be a debate about modernizing deposit insurance, what the insurance level should be, how it should be administered, and who should pay for insurance over $250,000.

Monson: What measures should be taken, if any, to mitigate the chances of bank failure moving forward?

Headlee: The U.S. banking system is the envy of the world. The number and diversity of banks in the U.S. is what makes it strong and gives the U.S. a competitive advantage over every other economy in the world. The U.S. banking system is already highly regulated. We have regulations governing capital, liquidity, asset quality and every service we provide. These bank failures highlight what remains as the most challenging risk to regulate – the panic that drives a run on the bank.

As Franklin D. Roosevelt said, “The only thing we have to fear, is fear itself.” This is why the Federal Deposit Insurance Corporation (FDIC) was created. This insurance fund is maintained through assessments paid by every bank in the nation. This fund has never received a penny of taxpayer money, has never failed to cover an insured deposit, and has served Americans and the U.S. economy well.

But in the case of SVB, most of that bank’s deposits were commercial deposits that were well over the insurance limit, and those deposits were controlled by a relatively few individuals who panicked. It may be that in today’s social media environment with revenue-driven cable news and easy-to-use electronic and mobile banking, we are going to need to revise the FDIC insurance system to provide more comfort and assurance. Fortunately, thanks to the strength of the industry and the quality of our assets, any necessary changes should be relatively easy to implement with no cost to taxpayers.