We heard some scary new rumblings this week involving the U.S. banking system.
The collapse of Silicon Valley Bank sent ripples throughout the financial system because of the strong reactions of the tech industry going on Twitter and provoking a mad scramble to get money out of that bank, which financed almost half of US venture-backed technology and health care companies. The sudden and unprecedented uncertainty resulted in a “dash for cash” that began in the markets for the most liquid and safe investments and unfolded with astonishing speed.
It’s the largest lender to fail since Washington Mutual collapsed in 2008. The risk of contagion is real, especially with Signature Bank also realizing the perils of doing business with crypto-currency firms.
President Joe Biden on Monday underscored that the American banking system remains safe, laying out how his administration is taking action to contain SVB’s collapse. He said the bank’s uninsured deposits would be fully backed by the US government.
Biden added that investors in the bank will “NOT be protected” and receive a bailout because they knowingly took a risk.
Good! No more taxpayer-funded bailouts! Not while the same financial system holds millions of student loan borrowers in limbo.
While scary, this is all very predictable. The problem is greed.
What’s happening is at least partially the result of Congress weakening the financial rules in 2018, rolling back parts of the Dodd-Frank Act that were passed in the aftermath of the 2008 financial crisis to protect consumers from risky speculation by bankers looking to get rich quick.
Liberated, banks like SVB then loaded up on risk while getting relief from the stringent requirements, arguing that their banks aren’t actually big enough to require strong oversight.
Nearly a week ago, before it all fell apart, SVB executives paid out bonuses hours before the Federal Deposit Insurance Corporation took over their failing bank.
Essentially, what happened is the bank funneled deposits into long-term bonds, making it hard for the bank to respond when the Fed raised interest rates to drive down inflation. While those interest rates were low, SVB had prospered with short-term profits up by nearly 40% over the last three years, according to U.S. Sen. Elizabeth Warren.
If the financial rules had not been gutted, SVB and Signature would have been subject to stronger capital requirements and required to conduct regular stress tests to expose their vulnerabilities and shore up against the risk.
Sen. Warren said banking is “supposed to be boring. It’s trouble when the bank CEOs can get a new corporate jet and add another floor to their corporate headquarters.”
Greed can work and be productive, but too often gains come at someone else’s expense.
Financial disruptions happen far too frequently these days. There are recurring elements to most crises. And in these similarities we can find valuable lessons that help us better prepare for the future.
After damaging incidents, new rules are set up to prevent regular people from losing our livelihoods and savings, but eventually someone who can make a lot of money whispers in the ear of a member of Congress and we end up here.
(1) comment
You fail to mention that it IS a bail out! The government is going to cover ALL deposits, well beyond the FDIC 250 thousand. This in includes Gavin Newson.
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