Two banks have failed; what does it mean?

On Monday, March 13th, all of Congress was called to an emergency Zoom meeting to discuss the bank failures that occurred on Friday and Sunday and how the federal government needed to respond to prevent a run on the banks and the collapse of the U.S. banking system.

The scare began on Friday when federal authorities took control of Silicon Valley Bank in California. Silicon Valley specialized in dealing with tech startups and investors. Many of the accounts in the bank exceeded the FDIC insurance level of $250,000.

By Sunday, a second bank, Signature Bank, was taken over by federal authorities.

What happened?

Anyone who has ever seen It’s a Wonderful Life, the Christmas movie with Jimmy Stewart, you know what a bank run looks like. Essentially, banks traditionally only keep a percentage of the depositors' money in cash. The rest they loan out as mortgages, auto loans, and other loans that deliver returns and make money.

When a bank run happens, depositors withdraw money faster than the bank can liquidate assets.

With Silicon Valley Bank, they had become flush with deposits from California start-ups storing their investors' money in the bank. The bank, rather than keeping it in cash or trying to loan it out in more traditional ways, bought bonds with the money.

Essentially, they were betting the bonds would provide returns before depositors asked for money. When lots of depositors showed up looking for their money, millions of dollars, the bank was forced to sell their bonds at very low rates. They lost money on their investment, thus losing profits and risking some depositors’ money.

On Friday, the federal government stepped in and took over, stopping the run. On Sunday, all of Congress was called together on Zoom call for an emergency meeting. The purpose was to ensure that Congress was on board with the FDIC's plan to guarantee all deposits, not just the ones up to $250,000, as the law states. Congress was okay with that. Without it, the likelihood that there would have been runs on banks all over the country was massive.

Biden and the GOP

On Sunday, it was announced that the Federal Reserve would create a new lending arm that can lend banks like Silicon Valley Bank money if there’s a run by depositors. It’s not that SVB didn't have any assets, but that those assets weren’t mature.

President Biden said that taxpayers wouldn't be footing the bill for the banks that failed, as they did in 2008 under President Bush. The FDIC would use the insurance money to cover some of it, and the Federal Reserve would help the banks to regain control.

Some Republican members of Congress, however, are saying this situation will cause higher bank fees that will affect customers who are also American taxpayers. Many GOP memes noted that the Biden administration didn't act in some logical ways. For example, while they designated Signature Bank and its $110 billion in assets a systemic risk, it didn’t designate SVB a systematic risk, despite it having $209 billion in assets. The difference may be based on types of depositors. Where SVB had large institutional depositors, Signature Bank had far more individual and small business depositors.

How did this happen?

During his campaign and the campaigns of many GOP candidates in 2016, Trump and other GOP hopefuls railed against the Dodd-Frank Act, a set of laws that governed the banking industry created in an effort to prevent another financial meltdown like the one we saw in 2008.

Trump and the GOP, with some assistance from Congressional Democrats, passed a law in 2018 undoing some of Dodd-Frank. The provision that has received the most scrutiny since the failure of these two banks was a provision that changed the definition of “too big to fail” from $50 billion to $250 billion. Doing that reduced the scrutiny on mid-size banks, like SVB and Signature.

When he signed the bill at the White House, Trump took a victory lap, pointing to the power of deregulation to improve business and make more money and jobs in the United States. In hindsight, the law he championed and signed may have created the loopholes needed to allow two banks with over $400 billion in assets to fail in a single weekend and force the Federal Reserve and the FDIC to find creative ways to stop them from taking down the entire U.S. banking system.

Senator Elizabeth Warren has introduced a bill to reverse the 2018 changes. She, many Democrats, and some banking officials are blaming the Trump-led push to reduce oversight with the collapse of these two banks.

"Congress, the White House and banking regulators should reverse the dangerous bank deregulation of the Trump era. Repealing the 2018 legislation that weakened the rules for banks like S.V.B. must be an immediate priority for Congress," Sen. Elizabeth Warren, D-Mass., wrote in a New York Times opinion piece Monday.

"Congress—in a bipartisan vote—caved to Wall Street and loosened our nation’s banking laws. I have no problem standing up to Wall Street, so I’m writing legislation to reverse that risky law," Senator Katie Porter (D-CA) wrote in an email to supporters Sunday.

Some Democrats, like Senator Mark Warner of Virginia, defended their 2018 votes. Warner said, "I do think these mid-sized banks needed some regulatory relief." Warner said he felt the law put in appropriate levels of oversight.

Warner, like many of the Republicans who supported the 2018 bill, quickly pivots to “right now,” seeking to avoid being blamed for a change that took less than five years to collapse two banks with over $400 billion in assets and forcing the Biden administration to step in with extraordinary efforts to prevent a total collapse of the banking system.

Biden, for his part, is calling for the complete restoration of the Dodd-Frank guidelines but might find himself having to use his executive powers to keep the banking system in the U.S. from failing.

Is your money safe?

Unless you have more than $250,000 in any individual bank account, you’re fine. The FDIC, like any other insurance company, is set up to protect your money. The organization has hundreds of billions in cash and assets to keep these banks from collapsing.

As the situation unfolds, the Biden Administration may take additional steps, including firing and prosecuting the managers of the banks.

Bob Peryea, National Reporter for The Kentucky Daily

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