Extreme want… It’s an old story

A bank gets big, then bold. The bank plays fast and loose with money ‒ funds from depositors, borrowers, investors. Fast and loose becomes slow and strained, the money begins to dry up and soon people are nervous. They want their cash.
It happened again recently when Silicon Valley bank (California), followed by Signature Bank (New York), began to run dry after their risky investments failed. Silicon had invested heavily ($42 billion) in low-interest, long-term bonds that lost value when overall interest rates went up and kept rising. To cover losses, Silicon began selling the bonds and planned to sell bank stock to raise cash. Depositors got wind of this and made a run on the bank.
The banks would have failed without a federal rescue. Depositors were assured that up to $250,000 of deposits are federally insured; deposits beyond the limit were covered by the backup insurance financed by bank fees, not taxpayers. First Citizens, a North Carolina-based bank, will acquire the Silicon deposits and loans, including $72 billion in assets.
Another bailout, another lesson not learned. Eyes are on other big banks tempted to gamble large on the next big thing. Silicon and Signature catered to tech startups and venture capitalists peddling cyberworld visions and earth-bound shell games. Some of them work, many do not.
*
In global finance, the smallest big banks hold at least $100 billion in capital and surplus cash. Middling banks are in the $50-to-$100 billion range. New York’s JP Morgan Chase, America’s big bank ($3.5 trillion in assets), operates a branch in Leawood, in Johnson County. Bank of America ($2.4 trillion) also operates branches in Kansas.
Commercial banks and bank holding companies out here in the boondocks are not among the Earth’s big players. Their depositors are mostly locals who keep a steady eye on their checking and savings accounts. They invest in government securities and local (municipal) bonds; they loan to farmers, ranchers and merchants, for area housing and business, and they donate to local causes. They sustain the force and flare of local life.
State and federal bank examiners keep an eye on local banks.
*
Recent history, elsewhere:
In 2012 JP Morgan suffered a suffered a trading loss of between $2 billion and $3 billion. Investors were worried that this would nibble into their fortunes. Depositors with checking and savings accounts worried more.
During that Wall Street melee, two factors were overlooked. The first was a law, enacted two years earlier to head off the kind of hanky-panky that leads to multi-billion dollar gambles with depositors’ money.
The second factor was the long, slow grinding of congressional gears.
In 2010, congress had passed the Dodd-Frank bill, named for Sen. Christopher Dodd and Rep. Barney Frank of Massachusetts, who wanted something done about the government’s toothless regulation of huge banks. This law carried a provision called the Volker Rule, named for former Fed Chairman Paul Volker. It forbid commercial banks – which accept deposits from customers – from making speculative (“proprietary”) trades, or, gambling with depositors’ money.
The gambling was left to investment banks, such as Goldman Sachs, which are in business to wager their own money or clients’ funds.
The question was whether the commercial bank JP Morgan was gambling in the markets or simply investing to “hedge” against risks in other parts of its (then) $150 billion portfolio. This argument would not be resolved soon. In fact, the entire JP Morgan debate had been speculative.
That’s because Dodd-Frank was mostly an outline; regulators were to write the fine print later, but not much writing happened. The Volker Rule had been sterilized and consigned to a dark shelf. When JP Morgan’s gamble failed there was no law to argue because, two years after it passed, the Dodd-Frank outline continued to gather dust.
In 2018, President Trump signed a weak and debilitated version into law, a green light for covetous money changers.
Lesson again: The persistence of extreme want in wealthy institutions and an agreeable congress ensure that the law won’t bother them any time soon.
Megabanks aren’t too big to fail. They’re too big to regulate.