After the Silicon Valley Bank collapsed on Friday, the big bankers are once again looking at Washington with outstretched arms. We should be skeptical.
It certainly makes sense for Washington to take emergency measures to support depositors at New York’s own Signature Bank, a collateral consequence of SVB’s collapse. Many are entities like small business boards and cooperatives that never intended to take significant risk or play the markets and were simply looking for a place to park cash and operating reserves.
Less sympathetic is the money at SVB, the overleveraged, risk-seeking darling of the Silicon Valley venture capital circuit; a ransom gave us a whiplash.
Banks are not islands and the interconnection of the financial system and the reaction of the markets means that when one bankruptcy, the others are at risk. That was how Signature fell. And the dumping of the fire sale of First Republic shares yesterday has put another bank on edge.
The typical SVB depositor is not your typical Christmas club saver. Think cash-strapped startups with inflated valuations and uncertain income streams.
Still, stability and confidence underpin our entire banking system, and it’s okay for the government to make depositors, and only depositors, not investors, whole for both banks, particularly since won’t be the taxpayer on the hook. However, the cavalry should not enter untethered. The biggest reason for this mess is the ill-advised bank deregulation law of 2018 signed by then-President Trump, a deregulation trumpeted by many of the same people who now demand Uncle Sam to save them.
This should be taken as a clear signal that letting banks police themselves is not and has never been the right decision. The current moment of leverage should be used by the administration to rein in financial institutions that pose a risk to the economy, and Congress should be lining up to enact tougher rules. What you reap, you will sow.