In good times and bad, you’ll find few boosters as confident about the strength of the banking sector than New Jersey bank consultant Don Musso.
But, if you ask him if he expects to see a repeat of last year’s banking crisis — in which three significant banks tipped over within the span of a week, and led to a domino fall of stock downturns and other failures — he’ll admit it’s not likely to be a one-off.
He expects moments that resemble that historic crisis are more likely than not to occur again.
It’s for that reason his Somerville-based FinPro, which he founded and leads as CEO and president, is rolling out solutions meant to protect banks from sudden, sharp declines when depositors have liquidity concerns. That’s what kicked off Silicon Valley Bank’s March 2023 bank run, which spiraled into the failure of it, as well as Signature and First Republic banks.
“As a result of those failures, it became apparent that liquidity policies were designed for a cash society, not a digital society,” Musso said, adding, “(If) someone like Peter Thiel writes something bad about a bank, it’s going to spread like wildfire on social media. Within the next two hours, everyone in the world could be trying to move their money from that bank.”
The Federal Reserve itself suggested that social media played a leading role in Silicon Valley Bank’s collapse in a report after the bank’s failure. Conversations about the bank on Twitter, now known as X, spiked in the lead-up to what became the largest single-day bank run in the country’s history.
Putting aside the fact that Silicon Valley Bank and other involved banks targeted a specific niche within the financial system — a feature local community bank leaders regularly emphasized when responding to how widespread the fallout would be from those bank failures — Musso said last year revealed potential vulnerabilities in the way liquidity is managed at banks.
Banks can bring in liquidity steadily through the sale of securities and other balance sheet tinkering. But, with social media and digital banking accelerating how quickly deposits can move, Musso argues they need to be able to bring in liquidity more immediately. FinPro has been working closely with community banks to develop liquidity policies that would accomplish that.
Although no significant banking policy changes have been made in the wake of the 2023 failures, regulators have intensified their focus on lenders’ contingent liquidity plans. Acting Comptroller of the Currency Michael J. Hsu has in the past year commented on the liquidity issues accompanying higher risk deposits and called for regulations involving short-term bank outflows.
The risks of uninsured deposits were particularly underscored following the recent ailing bank headlines, given that Silicon Valley Bank reportedly held more than 90% uninsured deposits in its portfolio.
“If you think about what happened at Silicon Valley (Bank), it makes sense,” Musso said. “If I had a $2 million deposit there, and only $250,000 was protected by FDIC insurance, I wouldn’t want to risk losing the majority of my money. I’d be in a rush to move it.”
FinPro wants to be among the first to develop a risk-sharing pool for community banks holding uninsured deposits. Their Community Bank Uninsured Deposits Program, as it’s called, would form a consortium of banks in which any failure among a member would be covered by others, which would agree to all buy the bank’s assets and funding and thus protect depositors.
Musso boasts of FinPro’s proposed solution being half the price of FDIC insurance and even more competitive than that compared to existing safeguards for cash balances, which are offered by a firm such as IntraFi.
His hope is to get at least 400 to 500 banks on board — and potentially as many as 1,500 over time.
Although FinPro has made regulators aware of what they’re working on, it won’t be formally introduced to them until early August. None of the banks expected to participate in this program will put money into it until it receives the green light from regulators.
“So far, we haven’t had any major negative pushback,” he said. “Some (banks) are expressing real interest, and some are taking a wait-and-see approach. My guess is that, if the FDIC comes out and says, ‘This program is something we endorse,’ it’s going to take off like wildfire.”
A year removed from banks having to answer for disastrous industry headlines and resulting client anxieties, Musso believes there’s still going to be a strong marketing value in a bank being able to proclaim that they’ve done more to shield deposits than the competition.
“If (banks) don’t become a member, it’ll be used against them,” he said. “Imagine two banks in the same town, and I’m part of this program and, so, all of your deposits — whether insured or not — are protected; and the other isn’t part of it. I’m going to go after all of your customers to get them to move over and have them protected at no cost to them.”
Business clients in particular were already looking for extra cushion when making bank deposits, Musso said. That meant that many gravitated to banks considered “too big to fail,” like the country’s largest bank, JPMorgan Chase, which reported a surge in deposits after 2023’s turmoil. Its first-quarter earnings from last year exhibited a $50 billion gain in deposits.
The program FinPro is unveiling is limited to community banks with under $25 million in assets. It caters to banks with a high level of uninsured deposits, which tends to be those primarily serving commercial customers or wealthy retail customers.
The selling point goes back to this: Musso believes future bank failures are, unfortunately, an inevitability.
“So, no matter what we do, we have to account for them,” he said. “And you’re either going to preclude the next big bank run from happening or manage it once it starts. I prefer the first path.”
