Guest Editorial: Nobody should be happy about these bank bailouts | opinion columns
Last weekend, the United States suffered the second and third largest bank failures in the country’s history. That should not happen. After the financial crisis 15 years ago, a number of safeguards were put in place to prevent big banks from collapsing again, taking almost the entire banking system with it.
But once again, the federal government had to step in with a bailout for Silicon Valley Bank and Signature Bank on Sunday night — along with a bazooka of bailout funds to keep more banks from collapsing on Monday. It is good news that the dramatic action appears to have saved other regional banks from falling as well, although no one should be happy about the situation. Bankers were once again taking unwise risks and regulators were once again too lax.
There’s more to learn about all the mistakes that have led to this moment, but it’s already apparent that mid-market financial institutions need additional scrutiny. It is now apparent that the list of “too big to fail” banks is much longer than most people think. Congress and regulators must face this new reality and adapt quickly. Silicon Valley Bank was the 16th largest in the nation with approximately $200 billion in assets, and Signature Bank was the 30th largest with approximately $110 billion in assets.
These banks prioritize profit over prudence. The Silicon Valley Bank courted start-ups and venture capital funds. Signature Bank wanted to be a player in the crypto and real estate space. Both were heavily dependent on high-risk customers with many deposits well over $250,000, which is said to be the Federal Deposit Insurance Corporation’s insurance ceiling. In addition, the Silicon Valley Bank bought assets heavily, which fell in value as the Federal Reserve hiked interest rates to fight inflation. When depositors tried to quickly withdraw $42 billion on Thursday, the bank had no choice but to sell those assets at huge losses. The institution was mismanaged, but that kind of startling loss of confidence was difficult for even a better-managed institution to deal with.
Its executives were fired and shareholders were wiped out, but the FDIC, the Fed, and the Biden administration calculated that they had no choice but to heal all of the Silicon Valley bank savers. Among them were companies like Roku and Roblox, which may have struggled to pay workers if they lost their uninsured funds.
Then there were fears that the panic could escalate into a classic bank run, with people and companies suddenly withdrawing en masse from other medium-sized financial institutions. The risks for the overall economy and the banking system proved to be considerable. Meanwhile, tech luminaries — much like bank bosses did in 2008 — were quick to call for government intervention. When the crisis hit, some of Silicon Valley’s most vocal free market advocates were willing to put aside their libertarian principles to ask for help.
The taxpayers were not on the hook in this bailout. Regulators used money from fees banks pay to the FDIC. But over the weekend, a thorny precedent was set that all deposits – no matter the amount – would be treated as if they were insured. Banks won’t like it, but this new environment will likely require higher fees to keep the FDIC’s emergency funding pot large enough going forward. If not, since this fund is backed by the full confidence and credit of the US government, taxpayers might actually have to intervene directly.
As the panic subsidizes, there will inevitably be more scrutiny from banking regulators, particularly the Fed. Over the weekend, the Fed once again created a massive emergency lending program for the financial system from practically nothing. Yes, the quick action was a key reason other banks that were under severe pressure, like First Republic Bank, were able to stabilize. But congressmen have to ask: why does the Fed have to bail out the financial system so often? Surely there are better ways to prevent these problems in the first place.
It’s unclear exactly where the pitfalls lay, but the fact that small and mid-sized banks are under mild scrutiny needs to be addressed. The Dodd-Frank Financial Supervision Act mandated increased supervision and annual stress tests for banks with assets of $50 billion or more. In 2018, Congress voted — with bipartisan support — to raise that threshold to $250 billion in wealth, a move the editors called a mistake. When he signed the law into law, President Donald Trump hailed it as “a great cause for our country.” Silicon Valley Bank CEO Greg Becker was among the loudest voices calling for regulations to be rolled back for banks like his. He said his institution did not pose a systemic risk. That turned out to be false.
It is always easier to analyze the problems afterwards. Note that Moody’s Investors Service gave Silicon Valley Bank an “A” rating until shortly before its demise. The Fed’s intense rate-hike campaign last year was also a major stressor, with many on Wall Street warning that it was only a matter of time before something cracked.
But the most important finding is that this should have been prevented. No one welcomes the idea of a “bailout nation,” as it was called during the 2008 financial crisis and its aftermath. What we should have already learned is that the ideal way to prevent this is to send the guard dogs on patrol and not take their teeth.