Are we on the verge of yet another bank industry bailout? Who knows? But if so, depending on the form of future bailouts, the public will have a unique opportunity to finally exert meaningful control over this vital sector of the U.S. economy.
At this moment it is difficult to determine the spread, or contagion, related to the to two U.S. bank failures and a third bank which entered voluntary liquidation, which have occured since March 8th. The Biden administration has assured the public that the stockholders and bondholders of the troubled banks will not be bailed-out. It appears the administration has made a tenuous, but implicit guarantee, that depositors in failing institutions will be made whole, which includes those depositors which hold deposits in excess of $250,000–the amount insured in FDIC insured banks.
But make no mistake, a bailout of depositors is an indirect bailout of shareholders and bondholders in the larger banking industry. If depositors in the current crop of bank failures had not been bailed-out, bank runs would have assuredly occurred elsewhere, and shareholders and bondholders in those banks would have lost value on holdings in those banks as well.
In the case of Silicon Valley Bank (SVB), one of the recently closed banks, uninsured deposits accounted for roughly 85% percent of total deposits. Individual depositors, be they private firms or wealthy individuals, often held millions, sometimes in excess of ten million dollars, in deposits which exceeded the FDIC insured amount. These deposits would have been lost had the Federal Reserve (FED), Federal Deposit Insurance Corporation (FDIC), and the Treasury Department not concocted a solution to the second largest bank failure in U.S. history. Current at-risk deposits will be covered by the FDIC insurance fund and losses in the fund will be covered by assessments against other banks insured by the fund.
Silicon Valley Bank got into trouble due to its large holding in U.S. government and government insured mortgage-backed securities, which they were forced to sell, to raise money, in order to meet customer withdrawals. Problem was, the held securities had declined in value due to the rising interest rate environment. As interest rates go up, asset values decline. SVB sale of these securities forced losses onto its balance sheet which quickly ate away at its equity capital.
In order to protect depositors at future at-risk banks, a new emergency facility will be established which will enable banks to borrow from the Federal Reserve while posting collateral of Treasury Securities and other assets, at par (face value), rather than engage in forced sales at market value which will impose losses on the banks.
Now the big ideological debate is, as it always is, should bank bail-outs continue? My money is on the big-money which argues for bail-outs. Or to state it more clearly: “money talks”, and it will likely have its way with a political establishment dependent on big-money campaign contributions. So, we can probably expect depositor protections, i.e., bail-outs, to continue.
The public justification for the bailouts will be that if the financial industry collapses, due to continuing withdrawals of customer deposits, the consequences for working Americans will be severe–and, undoubtedly, this is correct. So fine, bailout the industry once again. But this time, if contagion spreads, and the federal government gets to the point where it begins to inject equity capital into these banks as it did during the Great Financial Crisis (GFC), we, the public, should insist that the government not sell its stock holdings, as it also did in the aftermath of GFC, in firms such as General Motors, insurance giant AIG, Bank of America, and other mostly financial institutions.
If the public is to continually bear the risk of the financial industry, and other industries, so that, in effect, the public-at-large becomes de facto part or full owners in these firms, then the public should gain steady returns on this risk undertaking. This ownership share should be accompanied with board representation. Permanent board membership will enable the government’s close scrutiny of bank risk activity, and also enable greater coordination of bank industry practices with broader public policy goals. The government can, if it chooses, maintain the current stock of bank executives, but at a pay scale much lower than the millions, sometimes tens of millions, which many of these executives “earn”.
The public, this time around, should take advantage of the crisis situation to obtain permanent ownership of a portion of the banking industry in order to adequately earn a return on the implicit risk it assumes, and to finally gain greater control over an important sector of the U.S. economy which has vast consequences for the public good.