Mar 18, 2023 - Economy

What banks are good at

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Illustration: Annelise Capossela/Axios

Good bankers know the industry they serve. They know its idiosyncrasies, its cast of characters, its business cycles. They help their clients through good years and bad — and are rewarded with deep loyalty and fat deposit accounts.

Why it matters: The industry that bankers know differs from bank to bank — but it's never banking. A wine-industry relationship banker at Silicon Valley Bank has to know much more about malolactic fermentation than about Tier 1 capital adequacy ratios.

  • Even at the CEO level, someone like SVB's Greg Becker found himself on the board of the San Francisco Fed not because he was an expert in banking, but because he had extraordinary visibility into California's technology industry.
  • With hindsight, that was an egregious conflict, given that the San Francisco Fed was SVB's primary regulator. All the same, bankers really do have an unrivaled level of insight into what's going on with companies that are too small to have gone public — including Silicon Valley startups.

The big picture: Capital markets and investment banks are very good at providing banking services to big public companies — but only about 15% of American jobs are at big public companies.

  • Commercial banks therefore provide a crucial and irreplaceable service — and, as is natural in all industries, they tend to specialize.
  • Silicon Valley Bank banked Silicon Valley, as its name implied, as well as the California wine industry. Signature Bank banked Broadway. Silvergate banked crypto.
  • Such relationships take time to build and nurture, which is one reason the federal government is keen to sell SVB and Signature as going concerns — and is a reason it's not trying to rescue Silvergate, which operated in an industry that authorities broadly want to be cut off from the regulated financial system.

Between the lines: In countries dominated by three or four massive universal banks, there's less idiosyncratic industry risk when a single mid-sized bank fails. But the U.S. has made a policy decision that it doesn't want its biggest banks to get any bigger than they already are — which means many more smaller banks with a broad range of specialties.

Where it stands: Risk management is a cost center for banks, not a profit center. The way to rise up the ranks at a commercial bank is to make money for your employer — and the way to do that is to know your customers and their needs really well.

  • When commercial banks fail, outsiders are often shocked at how badly they handled things like interest rate risk or deposit concentration risk. But those jobs are done only at the top of the org chart — and the people who rise that far tend to do so not because of their understanding of how banking works, but because of their understanding of other industries entirely.

The bottom line: There's an obvious financial-stability reason for regulators to want to minimize bank failures. But there's also a grassroots economic reason. Regional banks like SVB and Signature are deeply embedded in local industry, and without them many industries would find themselves in deep trouble.

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