GSB Offers Certainty in Unsettling Financial Times

Over the last few days, you’ve likely seen the reports concerning the failures of Silicon Valley Bank (SVB) in California, the recent closing by regulators of Signature Bank, New York, and the self-liquidation of crypto currency bank Silvergate.

We understand how dramatic and concerning these headlines seem and we want to take a moment to reassure our clients that GSB remains as strong today, as it ever has been.

What Happened?

The short story is that SVB faced a classic “run on the bank”, and that Signature bank, facing broad exposure and risk in the cryptocurrency market, was closed by regulators seeking to stem a banking crisis.

SVB served a niche market of technology and other start-up ventures. They leveraged that niche customer deposit base to make investments and loans at historically low interest rates, and long dated maturities.  At the same time, the Federal Reserve, over the past year, pursued aggressive interest rate increases to help stem inflation.  This eroded the value of SVB’s investments creating huge losses and a substantial decline in the Bank’s stock price. With the dramatic news of the bank’s poor structural integrity last week, and customer calls to rapidly pull deposits, the bank was unable to meet financial obligations. SVP was taken over by The Federal Deposit Insurance Corporation (FDIC) on March 10.

Silvergate and Signature Bank faced significant pressure due to a concentration of business in the crypto industry. While other banks were performing appropriate due diligence on their clients, and as a result were reluctant to bank crypto clients, these two banks rapidly expanded their crypto portfolio. Crypto clients were forced to place large levels of uninsured deposits at a single institution.

Upon the collapse of the crypto market in late 2022, associated deposits hastily declined. This circumstance set-off a quick downward spiral for the bank.  The rapid loss of deposits created a funding shortfall, which the banks had to replace with other high-cost sources.  Wall street took notice and punished the stock, eliminating the Bank’s ability to raise more capital.

Depositors acted recently, noting the poor financial condition, and attempting to protect their uninsured deposits by moving money to stable institutions. With today’s technology, this run on the bank was exponentially greater, as large volumes of money moves in seconds.

With the run on the bank, Silvergate and Signature could not meet their financial obligations. Silvergate self-liquated and the regulatory agencies shut down Signature bank.

What are the Bank Regulators doing to help?

• When Bank Regulators perceive drastic deterioration in financial condition, or if there is a run-on bank deposits, they typically shut down the institution to prevent further losses. Regulators analyze the situation, provide insurance to depositors as warranted, and set up a process for depositors to receive access to their insured deposits in a fair and orderly fashion.
• Recently, in a joint move by the Federal Reserve and Treasury Department, the extraordinary step was taken to designate SVB and Signature Bank as a “systemic risk to the financial system,” giving regulators flexibility to backstop uninsured deposits.  This move will essentially protect depositors from any deposit losses resulting from the bank failures.
• Clients should not rely on the extraordinary measures recently implemented to guarantee uninsured deposits. To avoid banking disruptions and/or loss of uninsured deposits, clients should confirm their financial institution is well-capitalized, and avoids risky business practices.

How is GSB different?

GSB has provided safe, secure banking to families, businesses, and commercial clients for nearly 150 years. We are, and remain well-capitalized, protected, and positioned to serve your financial needs into the future.  More specifically:

• GSB has higher capital ratios, a stronger balance sheet, a stable deposit-base, and better access to funding as compared to the banks that recently failed.
• Our capital allows us to meet financial obligations, borrow funds when appropriate, and absorb any losses in the rare event they occur.
• Our depositor base is stable and well diversified. GSB has a mix of consumer deposits from many towns in Connecticut, as well as deposits from small businesses in diversified industries. The Bank does not rely on a small concentration of large depositors to fund our assets.
• Given our sound balance sheet and capital position, GSB has strong relationships with many funding partners. As a result, GSB has access to an abundant amount of funding should the need ever arise.
• Clients place trust and confidence is GSB. Despite the turmoil caused by these risky banks, GSB has experienced deposit growth in recent weeks. This continues our long-term positive trend, growing stable deposits at an average annual rate 9% over the last 5 years.

While we continue to be a forward-thinking institution with diversified investments, we are committed first and foremost to the safety and security of our clients and their financial wellbeing.

Please feel free to reach out to us with any questions or concerns on this topic, or any others related to GSB and your banking relationship.