To the editors: Silicon Valley Bank failed last week after it suffered a classic “bank run.”
Time will tell if we have entered a new period of banking system fragility like the one that led to the Great Recession. I believe the mortgage crisis of the late 2000s was, at its core, caused by bad government policies. For example, the mandate that banks ignore a borrower’s credit quality when making mortgages, which led to the advent of “subprime” mortgages, many of which came to be known by another name: ”liar loans.”
When that house of cards collapsed, the Fed rescued the banks by dropping overnight rates to near zero, where they have stayed ever since. In other words, banks could borrow from the Fed essentially for free and turn around and lend that money back to the Treasury, making riskless profits. That went a long way to repairing the banks’ equity, the cushion depositors rely on. But depositors paid the price in the form of artificially low rates of returns on their deposits.
Now, the Fed is reversing course and raising rates in response to inflation caused by bad government policies. And banks are vulnerable to runs because their deposits can leave at the click of a button on a smartphone, but their longer-term bond and loan portfolios are worth less than par due to rising rates. Therefore, the more assets they sell to fund depositor withdrawals, the weaker their financial position becomes, which in turn encourages more withdrawals.
The Federal Deposit Insurance Corp. raised its insurance cap to $100,000 in 1980, at a time when the median home price in the United States was about $66,000. Today, the median home price is approximately $470,000. Based on that increase, FDIC insurance should be capped at about $630,000, much higher than the current $250,000. Given that depositors pay for this insurance (through lower rates of return), it’s a scandal that the cap remains so low.
Shareholders, bondholders and employees of failed banks deserve to lose their jobs and investments, but depositors should not be left holding the bag. The Biden administration did the right thing in protecting SVB’s depositors, but they need to do more and assure all depositors that their money is safe.
This paper would do its readers a great service if it would keep a close eye on developments at our local banks.
Rob Grien, West Stockbridge