Connecting Bank Failures: What Changed?

    About $165 billion. That was the amount borrowed by banks from the Federal Government in March 2023 alone. Since the Great Depression, people have developed banks as a secure way to keep their money safe and earn extra interest. However, bank failures that played a prominent role in the start of the Great Depression still occur today, as seen by the 2023 United States banking crisis. But what factors are causing bank failures to still occur after the Great Depression?

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    In March 2023, the collapse of the Silicon Valley Bank (SVB) and the Signature Bank occurred, along with the bank failure of the First Republic Bank (FRB) shortly after in May. All banks at the time faced rising interest rates due to inflation during the pandemic, declining commercial property values, and a hint towards economic recession. However, the final straw that broke the customers' faith and caused a bank run was when the SVB announced a $1.8 billion loss and credit downgrade in March 2023 because of the value decrease in the U. S. Treasury bonds they invested in. The Federal Deposit Insurance Corporation (FDIC) soon took control of SVB and started paying for the uninsured deposits in the bank the following week. 

    Furthermore, the FDIC also shut down the Signature Bank 48 hours later after the collapse of the SVB because uninsured depositors were concerned with the cryptocurrency-related risks affiliated with the bank, as the bank mainly focused on private real estate, private equity, and cryptocurrency. A similar occurrence started appearing as people began to view banks under intense pressure and scrutiny, and banks like the FRB, which had a 111% loan-to-deposit ratio, suffered immensely. Even after several prominent U.S. banks gave it a $30 billion lifeline, the bank was closed and sold to JPMorgan on May 1st. One common factor is that these banks had an uncharacteristically high ratio of uninsured deposits to fund their businesses.  

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    Along with the decreasing confidence in banks and bank failures, a growing increase in the chance of a U.S. recession is also occurring. The Federal Government had to respond quickly to prevent the situation from affecting more banks by launching the Bank Term Funding Program (BTFP) and ensuring that uninsured depositors receive their money even above the $250,000 insurance limit. The BTFP allowed banks to borrow an amount for up to one year equal to the face value of their collaterals that exceeds the market value. This type of government intervention was similar to a bailout plan ended by Obama in 2010, although Joe Biden denies and asserts otherwise. 

    With the government's response similar to a bailout plan, it is unclear how effective the measures would be in the long term and how much confidence it would instill into depositors. The bailout only applied to Signature and SVB, disregarding the losses that could occur to uninsured depositors at other banks, and the loans that exceed market value do not provide stability against the decline in the value of securities at the banks. The government's response in this situation contradicts the methods FDR used during the bank failures in the Great Depression. Instead of relying solely on deposit insurance with government funds, FDR actively addressed the problem of bank runs resulting from a lack of confidence in banks. 

 Source: AP Photo

    During FDR's Presidency, he had to solve the issue of bank failures wiping out the lifetime savings of millions of Americans. Before the 1929 crash, a credit boom occurred, with banks extending too much credit for investors to buy stocks on margin and other consumers when their wages were stagnant. By the time the Federal Reserve raised interest to stop it, it was too late, and it didn't maintain adequate reserves to prevent the bank runaway from the stock market crash. The confidence in banks eroded as many closed their doors to protect themselves until FDR began taking action.

    

    In response to the banking failures, FDR's main goal was to instill confidence back into the public, as he stated, "Nothing to fear but fear itself." First, FDR passed the Emergency Banking Relief Act that called for a National Bank Holiday and formed the basis of the Glass-Steagall Act. He created a day to close banks and sent federal examiners to permit them to reopen with insurance coverage of $2,500 per account from the FDIC once the examiners established the banks as financially sound. After that, he gave the fireside chats necessary to restore public confidence in the banks and develop them to the current ones today. 

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    Understanding the causes of bank failures, FDR knew what needed to occur to restore public confidence in the banking system. He developed the banks in a way that would not drain the economy of the Federal Treasury while preventing future similar situations from occurring. On the other hand, the government solved the 2023 Banking Crisis by providing more loans through the BTFP and promising money back for the uninsured depositors who suffered only at SVP and Signature. The plans made for the 2023 Banking Crisis do not solve the decline of the values of banks in the face of inflation or instill confidence in the uninsured depositors of other banks. 

    Overall, both bank failures represent a situation where bankers don't maintain adequate reserves to prevent bank runs. While FDR focused on instilling confidence and using oversight to stabilize the banks, the current government tried to curtail losses with federal funds to stabilize the banks. Despite the difference in methods, they point to one thing. A stable and reliable banking system is essential in keeping our funds safe and secure. 

 Sources:

• Opinion | The Lessons of the Great Depression Are Being Ignored - POLITICO
• What caused the global banking crisis this week and will it lead to a recession? | CNN Business
• Looking back at the banking crisis of 2023 - TheStreet
• First Republic, Silicon Valley Bank and Signature: How Banking Failures Compare - The New York Times (nytimes.com)
• Banks borrow record-breaking $160B from Fed crisis lending programs | Fox Business
• Bank Run - Definition & The Great Depression (history.com)
• How Bank Failures Contributed to the Great Depression | HISTORY
• Don’t Call It a Bailout: Washington Is Haunted by the 2008 Financial Crisis - The New York Times (nytimes.com)