The failure to anticipate how quickly the Fed would raise interest rates has upended banks big and small this year. Three bigger ones collapsed this spring, but it is community banks that have been in a full-blown crisis, the Wall Street Journal reported. The losses on long-term bonds have unnerved depositors, investors and regulators who have questioned how bankers failed to properly protect themselves from interest-rate risks. Community banks typically focus on plain-vanilla lending, making a lot of small-dollar loans to businesses and households that fuel local economies. They also usually stay close to home, serving deeply loyal depositors but limiting their diversity and reach. In the wake of the pandemic, that business model has proven problematic. The banks were flooded with deposits. But loan growth had been slow, so banks turned to parking deposits in Treasurys, mortgage-backed securities and municipal bonds. While normally considered safe, the market value of those securities fell when interest rates climbed. That left many banks sitting on billions in paper losses, raising regulator and investor concerns. (Subscription required.)
