Over the weekend, the United States suffered the second- and third-largest bank failures in the country’s history. This wasn’t supposed to happen. A slew of protections were put in place after the financial crisis 15 years ago to prevent a repeat of big banks collapsing and nearly taking down the whole banking system with them.
But, once again, the federal government had to step in on Sunday evening with what amounted to a bailout of Silicon Valley Bank and Signature Bank — along with a bazooka of aid to prevent more banks from collapsing on Monday. It’s welcome news that the dramatic action appears to have prevented other regional banks from toppling, too, though no one should be pleased about the situation. Bankers were once again taking unwise risks, and regulators were once again too lax.
There’s more to learn about all the mistakes that led to this moment, but it’s already obvious midsize financial institutions need additional scrutiny. What is now apparent is that the list of “too big to fail” banks is far longer than most assumed. Congress and regulators have to face this new reality and rapidly adjust. Silicon Valley Bank was the nation’s 16th largest with about $200 billion in assets, and Signature Bank was the 30th largest with about $110 billion in assets.
These banks put profit over prudence. Silicon Valley Bank courted start-ups and venture capital money. Signature Bank wanted to be a player in crypto and real estate. Both had a heavy reliance on high-risk clients with many deposits well over $250,000, which is supposed to be the upper limit for insurance from the Federal Deposit Insurance Corporation. On top of that, Silicon Valley Bank heavily bought assets that sank in value as the Federal Reserve hiked rates to fight inflation. When depositors attempted to rapidly withdrawal $42 billion on Thursday, the bank had no option but to sell those assets at a deep loss. The institution was poorly managed, but this kind of stunning loss of confidence would be difficult for even one that was better run to handle.
Its executives were fired, and shareholders were wiped out, but the FDIC, the Fed and the Biden administration calculated they had no choice but to make all of Silicon Valley Bank’s depositors whole. Among them were companies such as Roku and Roblox, which might have had to struggle to pay workers if they had lost their uninsured funds.
Then there was fear that panic might spread into a classic bank run if people and businesses suddenly withdrew money en masse from other midsize financial institutions. The risks to the broader economy and banking system turned out to be hefty. Meanwhile, tech luminaries — much like the banking heads in 2008 — were quick to call for government intervention. When the crisis came, some of the most vocal proponents of free markets in Silicon Valley were willing to set aside their libertarian principles to plead for help.
Taxpayers were not on the hook for this bailout. Regulators used money from fees that banks pay to the FDIC. But a dicey precedent was set over the weekend that all deposits — of any size — would be treated as though they were insured. Banks won’t like it, but this new environment will likely require higher fees so the pot of emergency funding at the FDIC remains large enough going forward. If it is not, taxpayers could indeed have to step in directly as that fund is backed by the full faith and credit of the U.S. government.
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End of carousel- Lawyers plead guilty in racketeering case in Fulton County, Ga.
- The Biden administration announces more than $100 million to improve maternal health.
- Wisconsin Republicans back off impeachment threat against justice.
- Bahrain’s hunger strike ends, for now, after concessions to prisoners.
- A Saudi court sentences a retired teacher to death based on tweets.
Attorneys for Donald Trump have pleaded guilty in the racketeering case led by Fulton County, Ga., District Attorney Fani T. Willis. Even those lawyers related to the deals focused on equipment-tampering in rural Coffee County are relevant to the former president — they help to establish the “criminal enterprise” of which prosecutors hope to prove Mr. Trump was the head. The news is a sign that the courts might be the place where 2020 election lies finally crash upon the rocks of reality. The Editorial Board wrote about the wide range of the indictment in August.
The Department of Health and Human Services announced more than $103 million in funding to address the maternal health crisis. The money will boost access to mental health services, help states train more maternal health providers and bolster nurse midwifery programs. These initiatives are an encouraging step toward tackling major gaps in maternal health and well-being. In August, the Editorial Board wrote about how the United States can address its maternal mortality crisis.
Wisconsin state Assembly Speaker Robin Vos (R) announced Tuesday that Republicans would allow the nonpartisan Legislative Reference Bureau to draw legislative maps, a dramatic reversal after years of opposing such an approach to redistricting. A new liberal majority on the state Supreme Court is expected to throw out the current maps, which make Wisconsin the most gerrymandered state in America. Mr. Vos has been threatening to impeach Justice Janet Protasiewicz, whose election this spring flipped control of the court, in a bid to keep those maps. This led to understandable outcry. Now it seems Mr. Vos is backing off his impeachment threat and his efforts to keep the state gerrymandered. Read our editorial on the Protasiewicz election here.
Prisoners are eating again in Bahrain after the government agreed to let them spend more hours outside and expanded their access to visitors, a welcome development ahead of the crown prince’s visit to Washington this week. Activists say the monthlong hunger strike will resume on Sept. 30 if these promises aren’t kept. Read our editorial calling for the compassionate release of Abdulhadi al-Khawaja, a political prisoner since 2011 who participated in the strike.
A retired teacher in Saudi Arabia, Muhammad al-Ghamdi, has been sentenced to death by the country’s Specialized Criminal Court solely based on his tweets, retweets and YouTube activity, according to Human Rights Watch. The court’s verdict, July 10, was based on two accounts on X, formerly Twitter, which had only a handful of followers. The posts criticized the royal family. The sentence is the latest example of dictatorships imposing harsh sentences on people who use social media for free expression, highlighted in our February editorial.
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As the panic subsidies, there will inevitably be more scrutiny of bank regulators, especially the Fed. Over the weekend, the Fed once again created a massive emergency lending program for the financial system virtually out of thin air. Yes, the quick actions were a key reason other banks that were under intense pressure, such as First Republic Bank, were able to stabilize. But members of Congress have to ask: Why is the Fed so often having to rescue the financial system? Surely, there are better ways to prevent these problems from happening in the first place.
It’s unclear exactly where the pitfalls were precisely, but the fact that small and midsize banks face light scrutiny needs to be addressed. The Dodd-Frank financial oversight law enacted enhanced supervision and annual stress tests for banks with $50 billion or more in assets. In 2018, Congress — with bipartisan support — voted to lift that threshold to $250 billion in assets, a move the Editorial Board said was a mistake. As he signed the bill into law, President Donald Trump praised it as “a big deal for our country.” Silicon Valley Bank chief executive Greg Becker was among the loudest voices calling for the rollback of regulations on banks like his. He said his institution didn’t pose a systemic risk. That turned out to be false.
It is always easier to dissect the problems in hindsight. Consider that Moody’s Investors Service still gave Silicon Valley Bank an “A” rating until shortly before its demise. The Fed’s intense campaign to raise interest rates in the past year was also a major stressor, and many on Wall Street warned it was only a matter of time before something cracked.
But the key takeaway is this should have been prevented. No one welcomes the idea of this as a “bailout nation,” as the phrase went during the 2008 financial crisis and its aftermath. What we should have learned already is that the ideal way to prevent that from happening is to put the watchdogs on patrol and don’t take away their teeth.
