Banker’s Hours column: Putting the latest banking collapse in perspective … the enemy is, well, us
Now you finally know what too big to fail really looks like.
The FDIC went coast to coast in taking over Silicon Valley Bank in California and Santa Clara CA, Signature Bank in the Big Apple. Both were bankers to tech start-ups and the venture capitalists who funded them.
The FDIC insurance of accounts limit is, well, was, $250,000 per depositor. Yet the Federal Reserve and the Federal Deposit Insurance Corporation backed the funds of all of the bank’s depositors, corporate and individual. Mark Cuban, the owner of the Dallas Mavericks, had $5 million on deposit and he was made whole, thank God.
This piece won’t pretend to describe in detail what happened, because it’s been done better elsewhere in fascinating detail. Rather, we’ll focus on what this might mean to the future of banking, and to the rest of us who use banks, and ultimately pay for the mistakes made every 15 to 20 years.
Suffice to say that the problem with SVB and Signature was an old fashioned bank run caused by exactly the same factors that have triggered runs, recessions, meltdowns and depressions since Alexander Hamilton was Secretary of the Treasury back in 1789. These elements included so called hot money, deposits that could disappear, literally, on a moment’s notice. Borrowing short (taking in deposits in the current interest rate environment) and lending long, i.e. putting those deposits in long term treasury securities, and lending to borrowers (tech startups) who had negative cash flow and whose collateral was often no more than an idea; borrowers which, when new investment money for them to burn through, desperately needed their deposits in the banks to pay bills.
The Treasury, FDIC, and the Administration really had no choice other than to cover all depositors, whether they had $250 or $2.5 billion. A banking collapse is like a campfire that throws a spark into dry grass which spreads to the dead tree at the edge of the clearing, and then the whole forest is gone. At this writing there are some very hot spots in Europe that are requiring rescues by national governments.
Janet Yellen, Hamilton’s current successor at lthe Treasury, has said that the Federal Government will cover all deposits in FDIC and NCUA (National Credit Union Association) no matter what size. She was backed into a corner on that one. Say that the Second National Bank of Downriver Montana (fictional bank, fictional town) had gone broke last week. Would it have been fair for the widow who just deposited a life insurance check of $500,000 to get only $250,000 because of the FDIC deposit insurance limit, while giving Cuban his $5 million? Of course, not fair; not good politics either.
But Yellen’s promise is policy, not law. The insurance of accounts limit is still $250,000. And the commitment to cover all deposits is one stuffed with unintended consequences and collateral damage.
First is cost. The Administration has said that taxpayers will not be required to pick of the cost of making every depositor whole at SVB and Signature. Rather, the nation’s banks will be assessed the extra cost, and that cost can, and almost certainly will, go up as more uninsured deposits show up in failed banks.
The price of this will be paid by the rest of us, whether we’re called customers, consumers, depositors or taxpayers. In a free market, when the cost of doing business spikes, the customer covers.
For 90 years the FDIC deposit insurance limit has worked better than we realize. It’s been a major disciplinary factor in bank management and in customer behavior. When I read that close to ninety percent of the deposits of both SVB and Signature were uninsured, I was shocked and couldn’t believe how naïve I’d been. In the very small institutions where I worked, the amount of money that was uninsured was always a focus of bank examinations, and too much meant a supervisory letter from Uncle.
Now, that discipline is being virtually eliminated for everybody. No one has to keep in mind the insurance limit when placing a deposit, no bank has to consider it when accepting the cash, or that’s what Ms. Yellen has implied.
Or do they? Treasury and the FDIC could blithely cover all for years, and then along comes an executive order from an existing president that the practice has got to stop, so a lot of people are left twisting in the wind based on their government’s promise. Better to raise the insurance limit, maybe to $500,000, but keep it in place and enforce it.
So how did this mess come about, just 15 years after the Great Meltdown of 2008? Well, it was certainly a regulatory failure: there were more red flags at both banks than a Moscow May Day Parade in 1952. So, let’s blame the regulators — still.
The bank examiners answer to Congress, not the other way around, and in 2018 it passed a law amending the Dodd-Frank Act and easing regulatory oversight for banks the size of Signature and SVB. So, it’s the fault of senators and representatives, right. Glad that we got that settled. Yet …
As my regular readers — both of them — know, I’ve often made the point that we’re all motivated in line with how we’re compensated. Being a U.S. senator or representative is one of the cushiest jobs on the planet and most that hold those prized positions persist in pursuing them. They’ll do just about anything to please the people that keep them in Washington.
And who, class, might those people be?
Brilliant boys and girls! That’s right: the voters!
So, it seems that the enemy is … us.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is firstname.lastname@example.org.
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