George Bailey knew how to fend off a bank run. When the citizens of Bedford Falls ran to the bank to demand a return of their deposits, they encountered George, in the form of Jimmy Stewart, guarding the vault with a moral lesson.
“The money’s not there,” he explained, as banker turned preacher, pleading that one family’s savings had been invested in another family’s home. To panic, he argued, would hurt the entire community.
George at least had time to run to the bank and summon his thoughts. Contrast that with what happened at the Silicon Valley Bank in California late last week.
By various accounts this past weekend, a lot of naturally jumpy venture capitalists with large deposits at the bank, which specialized in that aggressive and competitive sector, were, in essence, in a group chat together. Within seconds, panic set in as the word flew around the tech world that the bank, which had seemed fundamentally sound, was in danger of collapse.
The run on the bank happened so quickly, George would not have had time to tie his shoes before the digital doors were locked and regulators appeared.
By the end of the weekend, federal officials were not only dealing with the collapse of a second institution, Signature Bank, but had come up with a novel solution to both insolvencies that involved disregarding the $250,000 limit on federal account insurance and making all the depositors immediately whole, including those with accounts containing hundreds of millions of dollars. The political fallout was managed by insisting that instead of spending any taxpayers’ money, there will be a special assessment on the banking sector itself.
For banks, this was not unlike a gut-wrenching special condo owners assessment for a building needing a new roof.
On balance, this was the best solution to a situation with no good solution.
The feds insisted this was no bailout, although you could argue that aiding depositors, if not share and bondholders in the bank itself, was still a bailout that implied those risk-loving businesses who chase the best banking deal in small institutions don’t have to worry about default.
So much for moral hazard on both sides. And anyone who carefully has kept single accounts within that $250,000 limit, or who forgo better returns for FDIC insurance, would appear to have been wasting their time.
And it’s overly naive to say that the “banking industry” will cover the mistakes of one of their own. In the end, much of that money will be extracted from consumers and businesses through higher fees, charges and interest rates.
On the other hand, the problems at SVB could have been catastrophic. Roku, for example, reportedly had hundreds of millions on deposit there. If you worked for Roku, you’d be happy that money was still there when payroll came due. If it was not, the panic would only have increased and ricocheted everywhere. The Fed had no choice.
There were lessons aplenty from the SVB fiasco. If anyone doubted the rapid rise in interest rates was going to extract its price, they see now that it will.SVB had invested its depositors’ money in treasurys and other seemingly safe vehicles that declined in value as interest rates exploded. Thus they could only be sold at a steep loss.
And SVB hardly was alone. For example, lots of smaller banks in Chicago and elsewhere are holding 30-year mortgages on homes that pay them around 3% in interest. Good for the long-term mortgagees but not for the banks’ bottom lines.
If you have your money in a big bank’s deposit account you’re probably getting a very low interest rate, if you even pay attention. That’s how the big banks are surviving. Lethargic retail customers do not react to interest rate changes like venture capitalists with hundreds of millions of dollars and itchy fingers. They’ll dump one account for another in a second if it gets them more interest or if they smell too much risk. Simply put, retail banking is a much better business right now than business banking, especially one focusing on venture capital.
It’s a topsy-turvy world. Clearly, the Biden administration misread how much money Americans were stashing away during COVID-19 and consequently handed out too much in stimulus funds. Inflation has been the result, and stubborn inflation, to boot. At the same time, the Trump administration’s loosening of liquidity and other regulatory requirements for banks now looks foolish. They should be rethought and reinstated.
But the most telling part of the events of the last few days is how fast the panic spread. Certainly, the close-knit community served by this bank is atypical, and the bank clearly made many mistakes in failing to account for the likelihood of rising interest rates.
But you can also chalk up this fiasco to the perils of instant communication. People tend to be unsophisticated in the understanding of whether it’s the fiscal facts themselves that are roiling the economy, or how fast knowledge and rumor spread.
Banking is not the only sector with this question. It also applies to the crime rate in Chicago. Is there really more violent crime or faster awareness of the danger of violent crime? Perhaps both, but it has changed how people feel. And vote.
As for bank runs? Today, George Bailey would be an hour late and a whole lot of dollars short.
