Another viewpoint: Bank failures will change system

The Washington Post

The United States recently suffered the second- and third-largest bank failures in the country’s history.

This wasn’t supposed to happen. A slew of protections were put in place after the financial crisis 15 years ago to prevent a repeat of big banks collapsing and nearly taking down the whole banking system with them.

But once again, the federal government had to step in with what amounted to a bailout of Silicon Valley Bank and Signature Bank — along with a bazooka of aid to prevent more banks from collapsing. It’s welcome news that the dramatic action appears to have prevented other regional banks from toppling, too, though no one should be pleased. Bankers were once again taking unwise risks, and regulators were once again too lax.

There’s more to learn about all of the mistakes that led to this moment, but it’s already obvious midsize financial institutions need additional scrutiny. What is now apparent is that the list of “too big to fail” banks is far longer than most assumed. Congress and regulators have to face this new reality and rapidly adjust. Silicon Valley Bank was the nation’s 16th largest with about $200 billion in assets, and Signature Bank was the 30th largest with about $110 billion in assets.

These banks put profit over prudence. Silicon Valley Bank courted startups and venture capital money. Signature Bank wanted to be a player in crypto and real estate. Both had a heavy reliance on high-risk clients with many deposits well over $250,000, which is supposed to be the upper limit for insurance from the Federal Deposit Insurance Corporation.

On top of that, Silicon Valley Bank heavily bought assets that sank in value as the Federal Reserve hiked rates to fight inflation. When depositors attempted to rapidly withdrawal $42 billion earlier this month, the bank had no option but to sell those assets at a deep loss.

The FDIC, the Fed and the Biden administration calculated they had no choice but to make all of Silicon Valley Bank’s depositors whole. Among them were companies such as Roku and Roblox, which might have had to struggle to pay workers if they had lost their uninsured funds.

Then there was fear that panic might spread into a classic bank run if people and businesses suddenly withdrew money en masse from other midsize financial institutions. The risks to the broader economy and banking system turned out to be hefty. When the crisis came, tech luminaries and bank heads, some of the most vocal proponents of free markets in Silicon Valley, were willing to set aside their libertarian principles to plead for help.

Taxpayers were not on the hook for this bailout. Regulators used money from fees that banks pay to the FDIC. But a dicey precedent was set that all deposits — of any size — would be treated as though they were insured. Banks won’t like it, but this new environment will likely require higher fees so the pot of emergency funding at the FDIC remains large enough going forward. If it is not, taxpayers could indeed have to step in directly as that fund is backed by the full faith and credit of the U.S. government.