United States Senator Hiram Johnson said: “The first casualty when war comes is truth.”
We can easily extend this aphorism to the fallout from bank failures where truth is an early casualty amid the ensuing turmoil. Case in point: Silicon Valley Bank.
Immediately following the forced closure of this California-based bank, formerly the 16th largest in the nation, the failure was framed as an unfortunate consequence of stocking up on government securities with unforeseen consequences. The rapid increase of interest rates engineered by the Fed was to blame for the calamity. This framing of the recent bank failures is one that bankers, regulators, and most media repeated.
After this initial framing, reality stepped in.
Initially, the government claimed SVB’s closure was not a systemic risk requiring costly restoration of all deposits, even those “uninsured” by the FDIC because they exceeded the $250,000 threshold. Days later, after substantial lobbying by bankers and billionaires, the collapse of SVB — along with the collapse of Signature Bank — was said to threaten the entire banking system. As a consequence, now all banks can borrow from the Fed at discounted terms to make sure bank failures do not spread, making this yet another time when the government bails out the bankers. It will be interesting to see if these measures can save other teetering banks, like First Republic Bank.
Interesting facts about the current banking crisis are coming out, bit by bit. SVB CEO, Greg Becker, was regulating his own bank while sitting on the SF Federal Reserve Board. This was until he was quietly removed when his bank was forced to shutter its doors. He had strenuously lobbied to weaken regulations so that SVB could continue risky investments in venture capital — that low and behold were critical in its collapse.
Next, we learn that a whopping 93.3 percent of SVB deposits were uninsured, with cryptocurrency firm Circle having $3.3 billion deposited in one account! So much bad news is emerging that the Department of Justice and the Securities and Exchange Commission have opened investigations. Additionally, Senator Elizabeth Warren, who opposed relaxing the regulations put in place after the 2008 banking crisis, has joined forces with Representative Katie Porter to sponsor legislation restoring those regulations watered down by Congress and signed by Trump.
Tightening regulations is a good first step. However, there are still many “too big to fail” banks that know that all of their deposits, even those beyond the $250,000 FDIC limit, will be guaranteed by the Feds in the next crisis. These megabanks benefit from the collapse of small and mid-sized banks with deposits being transferred to the big fish. Banking crises will continue to flourish if we fail to reform the culture of corporate banking, where banking CEOs and executives are awarded royal remunerations for raising share prices. Greg Becker’s compensation in 2021 was over $9 million, an enormous payout for incompetent management that doesn’t even include the $3.6 million he took home from selling SVB stocks shortly before the bank’s demise.
In addition to restoring and enforcing banking regulations aimed at countering the avaricious culture of banking, it is time to reform the entire financial system. With 563 federally insured bank failures since 2008 and more pending, we cannot assert that the American financial system is stable or trustworthy. For this reason, folks across the nation are advocating the establishment of public banks modeled after the great American public bank, the Bank of North Dakota (BND), which has reliably served the financial needs of North Dakota residents for over 100 years. The BND has safely held all of the state’s public funds and returns profits to the state’s treasury. It supports local investment by co-lending with community banks and credit unions on public interest projects. It even offers student loans at below-market rates to the state’s residents.
Public banks, like the BND, do not seek ballooning profits or reward their executives with exorbitant compensation. They see financial services as a public utility that is meant to improve the lives of residents. Public banks operate in concert with local community banks and credit unions to effectively provide loans to small and medium-sized businesses that the megabanks cannot be bothered with. They can fund energy-efficient affordable housing, small business support, and infrastructure improvements responsive to the climate crisis. All badly needed in San Francisco.
With public banks, financial services can be equitably and economically provided to counter the current narrative that overpaid banking executives in megabanks are the only ones who can manage our complex economy despite frequent bank crises. In San Francisco, the East Bay, Los Angeles, and Sacramento, public banking advocates are working to start municipal banks in accord with the state’s Public Banking Act, which was signed into law in 2019.
A new and improved national financial architecture that includes ample space for responsible municipal, state and federal public banking is needed to halt the cycle of bank failures and government bailouts to bankers that have now become routine.