Another Lehman moment: the banking crisis and how to fix it

On March 8, Silicon Valley Bank, a regional bank located in Santa Clara, CA released a message to its stakeholders regarding the bank’s financial performance and future plans.

Among other announcements, SVB announced that it had lost $1.8 billion in securities, or tradable financial assets, along with fundraising plans to cover said losses. One day later, depositors in the bank, mostly small tech startups, worriedly tried to withdraw all their savings as SVB’s investors panicked and the bank’s stocks devalued by 60%. 

Customers hurry to withdraw loans at Silicon Valley Bank. (Photo courtesy of Jim Wilson/The New York Times)

Within two days, the bank had run out of money to cover customer withdrawals, and the Federal Deposit Insurance Corporation took over the bank to prevent its complete collapse. The entire disaster, which took less than four days, was the second biggest bank failure in American history, behind only the shutting of Lehman Brothers in 2008. Nearly 15 years after the biggest financial crisis of the 21st century, history seemed to be repeating himself.

On March 12, another regional bank known as Signature Bank announced that it was ordered to close by the State of New York, while four days later First Republic Bank received a private-sector bailout, earning the aid of the country’s largest bank to avoid what many fear could be another financial crisis. Over in Europe, the USB Group, the largest bank in Switzerland, announced it was buying its historic rival Credit Suisse.

Many small and mid-sized banks have experienced similar financial woes to smaller degrees, and the American economists not already predicting a recession in 2023 have curbed their expectations for economic growth in the country. 

Suffice to say, in the span of little more than a week, an American public already cynical about the economy have been forced to relieve the fear and uncertainty that their lives and communities could be forced into a new recession caused by irresponsible banking executives who haven’t learned their lesson from 2008.

Public confidence in government is at an all time low, and a majority of Americans, from the older generations to the nation’s youth, do not expect the country to be a better place to live in the years to come. So far, the 2020s have proven to be a decade of fear, uncertainty, and cynicism, from national governments to business executives, scientists and religious leaders. The uncertainty of the banking system is just one more facet of people’s uncertainty, a glimpse into the blurring of the society we know into an unrecognized shape. 

For Americans who don’t remember a time for the late 1980s, it can feel like the failure of America’s banks has been a normal once-in-a-decade recurrence. However, looking back over the course of American history, there was a span of time, often known as America’s most prosperous, when bank failures actually felt like a thing of the past.

Following the Great Depression, Congress and the executive took strong measures to force America’s banks to adopt responsible behavior, and for nearly 50 years America avoided another banking crisis. Globalization and deregulation have undoubtedly led to many of the economic and social advances we enjoy today in the modern world, but one ailment they let back into the country was irresponsible business practices by our bankers. In order to prevent a future bank crisis, and allow America’s finances to be secure, we must return to an era of stronger regulatory action, enforcement, and corporate self-reliance.

One of the biggest policy changes concerning the banking sector to take place from the mid-20th century to the early 21st is the willingness of the government to bail out the banks. During the 1930s, when American banks were in worse shape than many of them are today. Under Roosevelt, Federal deposit Insurance, the backing of a depositor’s money in a bank, was created reluctantly and sparingly. The government did not want either banks or their customers to get the impression all their financial mistakes could be erased by a federal bailout, this encouraged bankers to make investments and take on loans only when they knew they could get a return on their customers’ savings. In 1933, when the federal government feared another banking crisis, all national banks were closed, and only allowed to reopen when they had proven they were in sound financial condition. Since banks weren’t allowed to be on the verge of bankruptcy, banking runs were absent from the U.S. economy for half a century, since customers weren’t afraid of never getting their money back. 

It’s important that customers get their money back, but having the government bail out the banks simply encourages the leadership of these corporations to be lax with their investment strategies and make poor financial decisions that risks account savings. The conversation about proper banking sector regulation and management has been dominated in the last 40 years by those who believe less oversight, less corporate discipline, and less regulation will lead to prosperity and stable economic conditions. Yet in the 23 years of this century, the world has already witnessed great financial upheaval that impoverished citizens and led to political and social unrest in many regions, all because the foundations of the global financial system have failed to be updated despite everyone seeing the cracks form. Customers should not be ensured of getting their money back in case of a banks collapse, they should be ensured banks will never have the options of risking their money.

The fact that Joseph Gentile,  CEO of Silicon Valley Bank was the the CFO,Chief Financial Officer, of Lehman brothers prior to its 2008 collapse shows that the system is designed to allow bad behavior to go uncorrected. It’s time for Congress and White House to take action and pass stricter banking regulations, to reinstate the entirety of Dodd Frank prior to its weakening in 2017. It’s time for America’s Presidents to reinstate discipline in the banking system, and make it clear a government bailout is no longer the policy of choice. Time will only tell if the country learns from this cycle of financial ruin, but who knows, maybe Joseph Gentile will end up in the new 20 years ago from today, and maybe the second Great Depression will signal his return to fame.