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Banks Have Plenty of Ability to Fund Loan Growth

Commercial banks are crucial to the economy and financial system. Banks play a vital role in the financial system by effectively allocating money from depositors to borrowers. They offer specialized financial services that make learning about potential borrowing and saving opportunities less expensive. These financial services continue to be the bedrock of the American economy and contribute to increased economic efficiency. However, the recent fears and rumors around Wall Street that there may be another impending banking crisis like that of 2008 have many wondering: Is still safe to transact business through banks? And how will this affect bank deposits?

We want to help alleviate your fears and give you insight into what is happening.

In this article, we will show why bank deposits are still safe and how the banks still have enough pulling power to fund loan growth. Let's dive in.

Female bank employees counting dollar bills on a counter - assisting clients with their bank deposits.

Are Bank Deposits Safe?

Over $150 billion in client deposits were put in jeopardy by Silicon Valley Bank's failure. In fact, this is the second-largest bank failure in American history. Days later, the American government promised to protect every deposit made to Silicon Valley Bank. However, the upheaval left people wondering: Is my money safe in the bank?

The truth is that bank deposits are secure even when the business experiences upheaval. Thanks to solid insurance coverage for bank savings and the rarity of bank failures. The Federal Deposit Insurance Corporation, or FDIC, which maintains the financial system's stability, ensures that bank depositors are covered up to $250,000 in money at all FDIC-insured banks.

The FDIC insures almost all banks and the great majority of accounts are below the $250,000 limit. In other words, anyone with bank accounts with $250,000 or less can feel confident that, if a bank fails, their money will have full protection coming from the American government.

The FDIC also covers an array of accounts. This includes checking accounts, savings, Certificates of Deposits (CD), NOW (Negotiable Order of Withdrawal) accounts, money market deposit accounts, and prepaid cards.

So, where does the issue arise if the FDIC has got banks covered? The problem with the most recent bank failures is that businesses and extremely wealthy people had deposits much in excess of what the FDIC can insure. Although these accounts exceed the FDIC limit, the U.S. government has assured all Silicon Valley Bank and Signature Bank depositors will be fully protected and can access all of their money.

The FDIC Simplified

The FDIC's insurance can be tricky to understand. It clearly states a limit of $250,000 per bank, account type, and person. Take, for instance, you have a $50,000 CD and $230,000 in a savings account at the same bank, both of which were only in your name. Your combined balance at that bank would be $280,000. If it collapsed, you would only have insurance for $250,000 and lose the other $30,000. However, if the savings account were a joint account with a wife, friend, or business partner, it would fall into a different category.

One strategy to secure your money, if you have more than $250,000 in deposit accounts, is to spread it in various account types or open accounts with various banks. The FDIC's BankFind service allows you to check whether a bank is insured.

Male bank employee shaking hands with clients during a loan agreement.

There is Still the Issue of Loan Growth

Economics 101 textbooks typically depict banks as financial intermediaries whose function is to link savers and borrowers. They facilitate their interactions by acting as reliable middlemen. Although they do various tasks, their primary responsibility is to collect bank deposits, pool them, and lend them to people needing money. 

At any time, these depositors might require their money. However, the majority of them do not. This makes it possible for banks to make longer-term loans using shorter-term deposits. In the process, deposits are transformed into loans through maturity transformation. This has been the primary way that banks fund loan growth. But are there other ways they can fund their loan growth initiatives?

In many cases, banks may also sell loans to a loan brokerage firm. This helps free up or generate capital to create new loans for more borrowers. They may sell it to other banks and lenders and still retain the rights to service the sold loan. When this happens, the borrower will continue working with the same bank and continue sending payments to it. In most cases, the customer remains unimpacted as they still have the same point of contact.

However, if the bank deems it is no longer viable to service the loan, they may sell it to a loan broker along with the debt and servicing rights. Of course, when this happens, banks must do due diligence and notify the lender of the change. After the change, the borrower deals with the new firm for all issues regarding the loan and makes payments to it. However, the terms and conditions of the loan remain the same.

Fund Your Loan Growth Initiatives Today

One of the major challenges plaguing banks' capacity, including their willingness to lend, continues to be profitability expectations. And while banks typically lend first and hunt for reserves later, they occasionally do both. One, if not the least expensive, method of securing those reserves is through luring new clients. However, the selling of loans can also assist in raising money to support loan growth.

In light of the recent upheavals in the banking industry, some banks may aim to restructure their loan portfolios by selling loans to other lenders. Those with a sizable loan portfolio may consider selling riskier loans to reduce default risks or selling non-performing loans to reduce service needs. They might also try to sell off underperforming accounts to quicken cash flow.

At Garnet Capital, we can help hasten the process for you. We match sellers with suitable purchasers and ensure the proper handling of all formalities to satisfy regulators' requirements. In a non-performing transaction, compliance and validation are particularly important, and Garnet has extensive experience helping customers access these markets.

For more information on how you can handle the sale or purchase of loans in the most effective manner, help you satisfy your regulatory duties, and improve your company's bottom line, feel free to contact us today.

Read on as we explore why bank deposits are still safe and how the banks still have enough pulling power to fund loan growth.