There is a banking crisis underway and the problems are spreading.
, Lisa Donner of Americans for Financial Reform and Dennis Kelleher of Better Markets, to name a few) are pointing to the Trump-era partial deregulation of medium-sized banks , which contributed to SVB’s failure. SVB’s capital and liquidity requirements were reduced, mandatory stress tests were eliminated, the rules against proprietary trading were suspended, and the need to prepare plans in case the bank became insolvent was eliminated.
In the cases of SVB and Signature Bank, FDIC insurance will cover all depositors regardless of size, but the Biden administration says this does not amount to a bailout. Does this sound right? I mean, if the U.S. government steps in to shore up deposits in failed banks, doesn’t such a move qualify as a bailout? And who ultimately benefits from a bailout?
Let’s use an analogy to see if that helps us decide. Say there is a fierce hurricane that hits Miami. Compare three people. One has a house in the middle of town, and it gets destroyed. Say this person could not afford hurricane insurance. If the government comes in and gives this person compensation to help his family get back on their feet, do we think most Americans will call this a bailout? I don’t think so. It is a rescue, or aid. Let’s say another person built a house on the beach.
There are other interesting cases that do not fit into a neat box. Little commented on, the SVB depositor rescue by the FDIC constitutes the first bailout of a major cryptocurrency firm. Circle — the issuer of its crypto-connected “stable-coin,” USD Coin — had deposits of more than $3 billion in SVB. These are Circle’s U.S. dollar assets that they use to try to maintain a 1-to-1 dollar peg between their “stable” coin and the U.S. dollar.
The bottom line, in my view, is that there have been serious bailouts here and more will probably be discovered; but it is not correct to paint all those with large deposits who got rescued as being “bailed out.” There is a structural problem in our current financial system. There needs to be a safe place for businesses to place their reserves and working capital without providing funds to speculative financiers, and without fear that their deposits will be wiped out in a bank failure.
The general consensus so far is that the SVB collapse will have minimal impact on global markets and global financial institutions. Be that as it may, it seems that the U.S. banking system has learned no lessons from the 2007-2008 financial crisis. If this is so, is the problem with private institutions geared toward the pursuit of profit at any cost, or with public policy?
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