The Washington Post

Many banks are ‘too big to fail.’ That’s the new reality.

The government steps in to rescue all depositors.


OVER THE weekend, the United States 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 on Sunday evening 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 on Monday. It’s welcome news that the dramatic action appears to have prevented other regional banks from toppling, too, though no one should be pleased 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 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 start-ups 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 on Thursday, the bank had no option but to sell those assets at a deep loss. The institutio­n was poorly managed, but this kind of stunning loss of confidence would be difficult for even one that was better run to handle.

Its executives were fired, and shareholde­rs were wiped out, but 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. Meanwhile, tech luminaries

— much like the banking heads in 2008 — were quick to call for government interventi­on. When the crisis came, 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 over the weekend 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.

As the panic subsidies, there will inevitably be more scrutiny of bank regulators, especially the Fed. Over the weekend, the Fed once again created a massive emergency lending program for the financial system virtually out of thin air. Yes, the quick actions were a key reason other banks that were under intense pressure, such as First Republic Bank, were able to stabilize. But members of Congress have to ask: Why is the Fed so often having to rescue the financial system? Surely, there are better ways to prevent these problems from happening in the first place.

It’s unclear exactly where the pitfalls were precisely, but the fact that small and midsize banks face light scrutiny needs to be addressed. The Dodd-frank financial oversight law enacted enhanced supervisio­n and annual stress tests for banks with $50 billion or more in assets. In 2018, Congress — with bipartisan support — voted to lift that threshold to $250 billion in assets, a move the Editorial Board said was a mistake. As he signed the bill into law, President Donald Trump praised it as “a big deal for our country.” Silicon Valley Bank chief executive Greg Becker was among the loudest voices calling for the rollback of regulation­s on banks like his. He said his institutio­n didn’t pose a systemic risk. That turned out to be false.

It is always easier to dissect the problems in hindsight. Consider that Moody’s Investors Service still gave Silicon Valley Bank an “A” rating until shortly before its demise. The Fed’s intense campaign to raise interest rates in the past year was also a major stressor, and many on Wall Street warned it was only a matter of time before something cracked.

But the key takeaway is this should have been prevented. No one welcomes the idea of this as a “bailout nation,” as the phrase went during the 2008 financial crisis and its aftermath. What we should have learned already is that the ideal way to prevent that from happening is to put the watchdogs on patrol and don’t take away their teeth.

 ?? BRITTANY HOSEA-SMALL/REUTERS ?? FDIC representa­tives speak with customers outside Silicon Valley Bank’s headquarte­rs in Santa Clara, Calif., on Monday.
BRITTANY HOSEA-SMALL/REUTERS FDIC representa­tives speak with customers outside Silicon Valley Bank’s headquarte­rs in Santa Clara, Calif., on Monday.

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