Remember the $120 billion in deposits withdrawn the week of SVB’s collapse? The opposite side of that coin is that big banks have deposits rolling in from depositors seeking to reduce their perceived risk to their cash accounts. These deposits are not limited to individuals. Businesses are moving in a big way. Businesses, as a whole, operate well beyond the FDIC limit of $250,000. Faced with the idea of having several million at risk, many businesses have moved their deposits. As big banks’ deposits grow, their cost of funds drops. Very quickly there may be a vicious pattern emerging for small banks. BIG BANK BLUE OCEAN? The million (and billion) dollar question is: Will big banks make a run at the small to medium-sized loans that community banks have been providing for years? Business owners and real estate investors have come to enjoy how easy it is to deal with a smaller bank, localized underwriting, and the fact that you can meet with your lender over lunch. We may all soon be faced with doing business a new way (i.e., with big banks) or paying up to get the deal done with bankers we know, like, and trust. •
political ties), you may conclude the FDIC would have been (and will be) much less generous. What actions are people taking? They are moving their money from community and regional banks to those the federal government proved, in 2008, were too big to fail. Small to medium banks in the U.S. “lost $120 billion in deposits, or 2% in the week of SVB’s collapse,” according to the Federal Reserve. Over half of those $120 billion in deposits went straight to the nation’s largest banks. Disproportionate to their size, small and medium-sized banks account for a large share of U.S. real estate loans. Goldman Sachs reports that “lenders with less than $250 billion in assets account for roughly 50% of U.S. commercial and industrial lending, 60% of residential real estate lending, [and] 80% of commercial real estate lending.” If you own real
estate, there is a high likelihood you bank (or at least have loans) with a smaller bank. You and I need to pay attention to what’s unfolding. Banks need deposits to lend and turn a profit. A DANGEROUS PATTERN As their deposits recede, regional and community banks will be forced to “buy” deposits through more expensive measures such as running CD specials. They might realize losses in their bond portfolio to get liquidity and then sell notes to other banks to balance their ratios, thus shrinking the size of the bank. The “buying” of deposits will increase their average cost of capital. When they add their margin to their average cost of funds, you may find yourself shell-shocked to hear their rate quote. It will have increased beyond step-lock with the five-year Treasury.
Neil Timmins is a real estate syndicator, broker, and educator. He generates passive income opportunities through industrial real estate in “Cash Flow
Country,” the Midwest. After spending years invest- ing in houses and $300 million in transactions, he graduated to investing in commercial real estate. Now he educates others on how to do the same. Neil hosts the podcast “Passive Real Estate Invest- ing with Mavericks.” His first book “Unicorn Hunting for Real Estate Investment Companies: The Com- plete Hiring Funnel” was released in 2021.
30 :: INVESTOR REVIEW :: JUL-AUG 2023
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