It is unfortunate we do not possess a “Wayback Machine” to fix the issues we are experiencing with banks since 1986. Instaed we bumble again and again, making the same mistake over and over with banks.

In a cartoon series called Peabody’s Improbable History, Mr. Peabody and Sherman would open the door to the past, speak in English to everyone they met (even if they could not speak English). The translation was a part of the machine. Both Mr. Peabody and Sherman were enabled to correct any distortions that were occurring then and having an impact in the future.

This is more a commentary about banks and how we are arriving at another crisis. In 2023, I wrote this:

Two Banks in Trouble, Some History, and Four Opinions

I have read enough on the bailing out of two banks (Silicon Valley Bank and the smaller Signature bank). in 2018, I had argued against increasing the $50 or $100 (?) billion limit to $250 billion. These were commercial banks which were allowed in 2008 to join with Wall Street banks to dabble in securities. Banks writing home mortgages had skipped the practice of registering them with the counties. Not a safe practice. Here we are in a situation where banks overextended themselves again with fewer dollars in reserve to cover withdrawals. If you recall, AIG was doing CDS with pennies on the dollar. Then Goldman Sachs called on them to ante up. We got to this how?

In December 1986, the Federal Reserve Board, which has regulatory jurisdiction over banking, reinterprets Section 20 of the Glass-Steagall Act, which bars commercial banks from being “engaged principally” in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business.

After numerous changes were made to Glass Steagall (over time), it was repealed to help out Sandy Weil and John Reed to merge CitiCorp and Travelers. One option was to repeal Glass-Steagall and alter the Bank Holding Act.

Oct.-Nov. 1999 Congress passes Financial Services Modernization Act which repeals GS and modifies the Bank Holding Act. This was the start of 2008. In 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act is passed in 2010. In 2018 the limit for harsher surveillance was raised to $250 billion as led by Repubs. At that time, Barney Frank said:

“Raising the threshold to $250 billion goes too far, because the failure of two or three banks in that category could pose systemic risk problems.”

So “again), here we are today. (only added the word “again.”

You will read four brief opinions on what should be done to correct the situation banks have once again put us in. I favor sending some bankers to jail. Others may have different opinions.

How 2018 Regulatory Rollbacks Set the Stage for the Silicon Valley Bank Collapse, and How to Change Course, Roosevelt Institute, Todd Phillips

This weekend saw two of the largest bank failures in US history, including the second biggest ever. Silicon Valley Bank (SVB), the 16th largest bank in the US, with more than $200 billion in assets, was put into receivership Thursday night. Signature Bank, with just under $100 billion in assets, followed suit. On Sunday evening, the Federal Deposit Insurance Corporation (FDIC) used its “systemic risk exception” to prevent uninsured depositors at these institutions from taking losses. The Federal Reserve launched a new liquidity facility aimed at taking unrealized losses. The losses resulting from holding depreciating assets without selling them off of banks’ balance sheets.

SVB clients were largely startups and other businesses, resulting in a large number of accounts well in excess of the $250,000 ceiling for FDIC insurance. Additionally, SVB’s fast growth and asset and liability mix should have been a warning sign to regulators of its potential to fail. These kinds of risks can be mitigated with appropriate regulations and oversight of the kind that Congress enacted in 2010 with the Dodd-Frank Wall Street Reform and Consumer Protection Act. Due to the rollback of several key Dodd-Frank provisions and an emphasis by lawmakers in 2018 of midsize banks needing lighter oversight than large banks. As a result, regulators did not supervise these banks sufficiently. This allowed them to get into a financial position where they could not withstand runs. Additional congressional action is needed to close these regulatory gaps. Regulators today also have existing authority to strengthen rules immediately. These regulations should:

• Subject all banks above $100 billion in assets to annual supervisory stress tests, resulting in faster application of the stress capital buffer;
• Restore the modified liquidity coverage ratio for banks between $100 billion and $250 billion;
• Prevent banks with more than $100 billion from opting out of including accumulated other comprehensive income (AOCI) on their balance sheets;
• Return to the pre-2018 capital rules; and
• Require all institutions with more than $100 billion in assets to submit resolution plans annually.

The Fed’s Silicon Valley Bank Cover-Up Won’t Work, The American Prospect, David Dayen.

The Federal Reserve’s bank supervisors are busily trying to cover their collective backsides after the Silicon Valley Bank collapse. In the past few days, both Bloomberg and The New York Times have come forward with the same story: Frontline examiners saw the problems at SVB over a year ago and sent formal requests for the bank to fix deficiencies in operations and risk modeling.

So Fed officials weren’t entirely clueless. But I don’t think the people leaking this information realize how bad this makes the institution look. It’s an indictment of their role in financial regulatory policy—an effective admission that banks don’t really listen to them, confident in the knowledge that they won’t suffer any penalties for such impudence and will in fact be rescued if anything goes really wrong. Which, of course, is exactly what happened, so you can’t even blame Silicon Valley Bank for its confidence.

Let’s dive into these leaks. Both claim that, after the Federal Reserve Bank of San Francisco replaced the old bank examination team for SVB with a fresh set of eyes in late 2021, they immediately caught a host of problems. The bank’s models contained assumptions that higher interest rates would bring in more revenue on loans, offsetting the losses on long-dated securities in its portfolio. This was a wildly wrong interpretation. SVB also could not track its own interest rate risk in real time. BlackRock’s consulting firm told the bank after a review that it had poor risk controls compared to its peers and was unable to even produce a weekly report of its securities portfolio.

Beyond the interest rate risks, there were indications SVB would not be able to find enough liquid cash in the event of a flood of deposit withdrawals. In addition, as any bank examiner or interested citizen could easily see, SVB experienced extraordinary growth (a near-quadrupling of assets in four years), had a deposit base that by value was almost entirely uninsured and clustered in a tech sector that was having its own public struggles with higher interest rates, and was tapping the Federal Home Loan Bank system more than any other financial institution. A clear signal they couldn’t get traditional lending.

Opinion | Saule Omarova: Bankers Attacked My Views on Regulation. But My ‘Golden’ Idea Could Save Them from Themselves, The New York Times, Saule Omarova

The banking industry and its political allies waged a highly public campaign to block my candidacy and called my academic work, which examined the many failings of our financial system and called for stronger public oversight, un-American. But what ultimately sank my chances was the fact that I openly opposed loosening regulatory restrictions on America’s banks.

Now we are living through another banking crisis. It’s too early to tell how it will play out over the next few months or what long-term impact it will have. What is already clear is that when things go bad, the American public absorbs private banks’ losses and takes on their liabilities. We are the banking system’s true residual risk holder.

That’s why it is important to start thinking about how we can address the underlying causes of recurring financial crises. There is already an emerging consensus, at least on the left, that we need to reinstate the provisions of the Dodd-Frank Act that mandated stricter supervision for banks with more than $50 billion in assets but were rolled back in 2018. I fully support reversing that costly mistake. Doing so wouldn’t affect a vast majority of small, truly community-serving banks. It would merely restore the enhanced oversight of those banks whose problems, as we have learned, can trigger systemic runs.

The Answer to the Silicon Valley Bank Bailout: Federal Reserve Banking, Center for Economic and Policy Research, Dean Baker.

Word from the grapevine is that the risk of contagion may cause the Fed or the FDIC to engineer some sort of bailout of uninsured deposits, where they get paid back in full, instead of being forced to accept a partial loss on deposits over $250k. That would be unfortunate, since the people who run these companies that have large deposits are supposed to be brilliant whizzes, who should be able to understand things like FDIC deposit insurance limits.

Their incessant whining, that losing 10-20 percent of their deposits, would shut down Silicon Valley and the country’s tech sector, made for good laughs. However, the risk of a nationwide series of bank runs is a high price to pay to teach these people about the limits on deposit insurance.

We know that the view of most of our policy elites (the politicians who make policy, their staff, and the people who write about it in major news outlets) is that the purpose of government is to make the rich richer. But, there are alternative ways to structure the financial system for people who care about fairness and efficiency.

The most obvious solution would be to have the Federal Reserve Board give every person and corporation in the country a digital bank account. The idea is that this would be a largely costless way for people to carry on their normal transactions. They could have their paychecks deposited there every two weeks or month. They could have their mortgage or rent, electric bill, credit card bill, and other bills paid directly from their accounts.

This sort of system could be operated at minimal cost, with the overwhelming majority of transactions handled electronically, requiring no human intervention. There could be modest charge for overdrafts, that would be structured to cover the cost of actually dealing with the problem, not gouging people to make big profits.

Former Fed economist (now at Dartmouth), Andy Levin, has been etching the outlines of this sort of system for a number of years. The idea would be to effectively separate out the banking system we use for carrying on transactions from the system we use for saving and financing investment.

We would have the Fed run system to carry out the vast majority of normal financial transactions, replacing the banks that we use now. However, we would continue to have investment banks, like Goldman Sachs and Morgan Stanley, that would borrow on financial markets and lend money to businesses, as well as underwriting stock and bond issues. While investment banks still require regulation to prevent abuses, we don’t have to worry about their failure shutting down the financial system.

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So, here we are again. Discussing the same damn issues with banks who are gambling and know full well they will be rescued in the end because the economy can not allow them to fail. Nobody goes to jail. These are our brightest financial people who simply can not be trusted.