Can Community Banks Survive the Next SVB? | ModernFi CEO Paolo Bertolotti and Former Comptroller Gene Ludwig

Gene Ludwig dissects SVB's collapse as both inevitable (due to asset-liability mismatch) and unique (first time internet technology enabled instantaneous bank run). The crisis revealed that SVB was already a member of deposit networks that could have prevented the run, but 94% of deposits sat uninsured. Biden's bold move to guarantee all deposits stopped the contagion, but the systemic vulnerability remains.

• •SVB had massive asset-liability mismatch that regulators failed to address, but assets were US Treasuries (not junk)
• •First bank run in US history where internet technology enabled customers to move money faster than regulators could react
• •SVB was already member of deposit networks but wasn't using them - 94% deposits remained uninsured
• •Biden stopped the run by guaranteeing all deposits on TV, but underlying systemic risk remains unresolved
• •Fed could have prevented collapse by opening discount window wide enough, early enough

The US has an order of magnitude more banks than any other country - a deliberate design from founding fathers who despised British banking oligopolies. This fragmented system enables specialized lending to startups, small businesses, and local communities that large banks can't serve. Community banks are to credit what VC is to equity - enabling small businesses to grow into big ones.

• •Founding fathers created fractured banking system to avoid British oligopolistic banks that exploited them
• •US has ~10,000 banks/credit unions vs. 4-5 in countries like Brazil, UK, Canada
• •Community banks provide specialized credit access that drives American innovation and entrepreneurship
• •Local bank CEOs can pick up phone and advise businesses directly - Jamie Dimon can't scale to every small business
• •SVB's collapse left gap in tech ecosystem that hasn't been filled - demonstrating importance of specialized institutions

Ludwig became Comptroller of Currency in 1993 to restart bank lending after crisis. The idea for reciprocal deposits came from two sources: a Kansas City community bank losing deposits to big banks claiming fiduciary superiority, and his Aunt Betty riding buses between banks to get full FDIC coverage on her life savings. He built first 450 bank network personally, creating what became a half-trillion dollar market.

• •Clinton/Benson put Ludwig at OCC to restart lending after banks stopped in early 1990s
• •Community banks couldn't compete because big banks claimed fiduciary responsibility required FDIC insurance
• •Aunt Betty (immigrant's daughter) rode buses depositing money across multiple banks to get full insurance coverage
• •Reciprocal deposit concept: pool unused FDIC capacity across banks to provide unlimited insurance to customers
• •Had to invent use of resident memory vs normal memory because computer technology couldn't handle matching complexity

Paolo explains ModernFi built first reciprocal network for credit unions (5,000 institutions previously unserved) and is rebuilding bank networks with modern tech. Historical networks required separate portals outside banks' digital experiences. ModernFi integrates directly into existing web/mobile apps - customers simply check a box to get unlimited FDIC coverage, making it the default rather than exception.

• •Built first reciprocal deposit network for 5,000 US credit unions - previously had zero access to these products
• •Legacy networks required third-party portals separate from bank's digital experience
• •ModernFi integrates into existing bank web/mobile apps - customers check box for unlimited insurance
• •Product stack: operating account + high yield account + insured reserve account (e.g., $10M coverage)
• •Making reciprocal deposits the default rather than exception through seamless digital integration

ModernFi created Envid as bank-owned, bank-managed consortium modeled after Visa, DTCC, Swift, and Zelle. Banks get ownership stakes, governance rights, better economics, and revenue share. This solves three problems legacy networks had: poor technology, unfavorable economics, and misaligned incentives. The goal is to become the eighth US systemically important financial market utility, protecting the financial system.

• •Envid structured like Visa, DTCC, Swift, Clearinghouse, Zelle - member-owned utility for critical infrastructure
• •Banks get ownership stakes, board seats, governance rights, and revenue share from network they create value for
• •Legacy networks had institution-unfriendly economics that limited adoption and total addressable market
• •US has 7 systemically important financial market utilities - Envid aims to be the eighth
• •Bank enthusiasm drives adoption: signing 25 institutions per week because they own and benefit from success

Paolo reflects on attempting 'the worst idea of all time' - solving cold start problem in network effects business with financial institutions. The key was orthogonal approach: not just better tech (like competing with Google on search), but fundamentally different structure through bank ownership and alignment. Once flywheel starts, the hard part (first 20 institutions) pays off with massive opportunity on both sides of balance sheet.

• •Network effects + financial institutions = hardest possible cold start problem to solve
• •Better technology alone insufficient - need structural differentiation (ownership model vs. just better search)
• •Deep customer understanding drove solution: what banks actually wanted, worried about, would get excited about
• •First 20 institutions most painful, but creates foundation for expansion to asset side and other products
• •Customer-centric operation critical for big tech success - focus on adding critical value, not just features