Consider This from NPR - How Silicon Valley Bank Failed, And What Comes Next

Episode Date: March 13, 2023

The Biden administration took extraordinary measures to protect the accounts of customers at two banks that failed over the past few days: Silicon Valley Bank and Signature Bank.Federal regulators said Sunday that they were taking the emergency measures to prevent contagion at other small and regional banks in the wake of Silicon Valley Bank's implosion.NPR's David Gura reports that, despite those measures, many bank stocks plunged on Monday.And former Congressman Barney Frank, a Democrat who sponsored new banking regulations in the wake of the 2008 financial crisis, explains what he thinks went wrong at the banks. Frank more recently also served on the board of Signature Bank.In participating regions, you'll also hear a local news segment to help you make sense of what's going on in your community.Email us at [e-mail] more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

For Kamal Kapadia, the first signs of trouble came on Thursday morning. My co-founder is on some WhatsApp groups with some investors, as am I, and that's where the messages first started coming in. Kapadia is the co-founder of a climate education startup called Terra.do, and her startup was a customer of Silicon Valley Bank, also known as SVB. The bank is what investors on the WhatsApp group were worried about. Things were not looking good, and other investors had started telling their companies to pull money out of the bank. And so that's what our investors started advising. So Kapadia and her co-founder started figuring out whether and how they could get money out of SVB. After calls with the bank and their investors, they decided by Thursday evening to make the move. But at close of business,

their money was still at SVB. Then came Friday. A major development in the banking world. The FDIC just reported the California regulator shut down Silicon Valley Bank. We find out this shocking news and all our founders and our chief business officer were on Zoom call. And we try, we're trying to get into the bank account and we can see the account, but you can't do anything like everything is frozen. Because Terra.do wasn't the only company trying to get money out of Silicon Valley Bank on Thursday. Lots of other startups were too. And that triggered a run on the bank. It essentially collapsed and got taken over by the Federal Deposit Insurance Corporation, the FDIC. At this point, we're like, okay, we first of all,

we don't even know if we can access our money, but we need another bank account. That was our first thought. Without a working bank account, their whole business was basically on hold. They couldn't pay for the cloud computing they need, couldn't make their next payroll or process incoming payments from customers.

So Kapadia got into her car and drove around Berkeley, California, where she lives, looking for a bank. I ran into Chase. They didn't have a manager available at the time. So I literally like stood on the corner, like in downtown Berkeley, and I saw a city bank. I ran there. They were not open. So then I moved. I ran to Bank of America and they were able to open an account for me. But there was still the question of the money in their Silicon Valley bank account. The FDIC insures accounts up to $250,000. Terra.do is a small startup, but Kapadia says its balance was in the millions.

This money is just absolutely critical for our survival. We manage our money very, very carefully. The next question was, OK, even this 250K, when will we access it? Because literally next week we have to pay salaries. Kapadia's company got good news over the weekend. On Sunday, the Biden administration announced that the FDIC would give Silicon Valley Bank customers full access to their deposits, even balances above $250K. When we talked to Kapadia Monday afternoon, she said more information was coming out by the minute. We are just actively monitoring all the news channels, looking for this information and acting as soon as we can.

Meanwhile, we're also trying to run our business. And like a lot of people, she's also trying to piece through how this happened, especially just 15 years after another banking crisis upended the U.S. economy. You know, it's not that long after 2008, and clearly we have a lot still to do. We don't seem to have learned those lessons well enough. Consider this. New regulation passed after the 2008 subprime mortgage crisis was supposed to shore up banks to weather financial storms. We'll ask one of the congressmen who championed that legislation what he thinks led to this weekend's banking

implosion. From NPR, I'm Ari Shapiro. It's Monday C's apply. It's Consider This from NPR. It wasn't just Silicon Valley Bank. On Sunday, New York regulators shut down Signature Bank. Like with SVB, the FDIC will also backstop all of Signature's deposits, even those above the $250,000 limit. It was an extraordinary step that federal officials said was necessary to strengthen public confidence in the U.S. banking system. President Biden spoke about it Monday morning. Your deposits will be there when you need them. Small businesses across the country, the deposit accounts at these banks can breathe easier knowing they'll be able to pay their workers and pay their bills. And their hardworking employees can breathe easier as well. But the stock market didn't seem to breathe easy. Shares of regional banks sank. My colleague Mary Louise Kelly spoke with NPR's David Gura

about the potential risks of contagion. David, bank stocks going down, down, down, down today. What's going on? Investors are concerned other banks could collapse. And just to recap quickly what's happened here, on Sunday, regulators announced they'd taken emergency measures to make sure all customers of those two banks you mentioned, Silicon Valley Bank and Signature Bank, could access their money. But despite that, shares fell of regional banks and banks that have a lot of deposits that are not insured by the FDIC, deposits that are larger than $250,000. First Republic Bank is one of those. It caters mainly to wealthy clients, tech companies. It's headquartered in San Francisco, and its share price fell by more than 60% today. The

NASDAQ temporarily halted trading of its shares shortly after the opening bell. Key Corp and Comerica were down about 25% each. Zion's Bank Corporation of Salt Lake City was also down. Again, Mary Louise, after President Biden told Americans not to worry about the health of the banking system. Yeah, President Biden saying not to worry about the health of the banking system. Are we buying this? Is the banking system safe? Well, there's no indication other lenders are in financial trouble, but administration officials emphasize they're being vigilant. It's important to note that yesterday, the Federal Reserve said

it's willing to provide loans to any other banks that encounter difficulties. But we've had three banks close in the span of one week. Silvergate Bank, which is known for lending to crypto companies, is winding down its operations and paying back deposits. Chris Katowski is a longtime bank analyst. He's with Oppenheimer. And he told me he's of the belief this is going to blow over, although it is going to take some time. He says at their core, these companies are solid, and this is not a replay of the global financial crisis. If you think about the current problem, right, is not that these banks made a bunch of bad loans. The current problem is that maybe they bought a few too many government-backed securities.

That's partly what led to Silicon Valley Bank's collapse. Normally, government bonds are among the safest investments around, but when interest rates rise really fast, as they have, that's not the case. Their value diminishes, and Silicon Valley Bank sold a big chunk of its bond portfolio at a $2 billion loss to keep up with demand for customer withdrawals. Okay, stay with that point for a second, the customer withdrawals, because this is so interesting how the psychology of bank customers would contribute to what's going on.

Yeah, what's driving this now is how people feel, and it is really hard to stop a bank run once it gets going. People start making emotional decisions. Matthew Richardson is a finance professor at the NYU Stern School of Business, and he explained the psychology to me of bank customers at a moment like this. Now, let's take some of these other banks. Maybe they're much healthier, but at some point, I don't care so much about the health of the bank. I'm concerned about what the other depositors are going to do. You're looking to the right and to the left, and that's what's difficult here, Mary Louise. No matter how healthy banks are,

if depositors feel skittish and take their money out, things can really snowball. It leads to even more fear about the bank, even if the Fed is offering short-term funding as it is. Okay. So give me a roadmap for the next few days. What should we be watching for? Yeah, we're going to see if this blows over, but I'll note this is playing out at a very tricky moment because investors already felt like the market is weakening. Before this, Wall Street's preoccupation was with trying to figure out the Fed's next move. You and I have talked about this an awful lot. If recent economic data, which have come in stronger than expected, will propel it to raise interest rates more aggressively to fight high inflation.

What's happened in recent days could make them warier, and a discussion is underway about whether there needs to be new banking regulations, and the president has resolved to get to the bottom of what led to these bank collapses that we've seen over the last week. NPR's David Gurris speaking with my colleague Mary Louise Kelly. As David just mentioned, lawmakers are starting to talk about whether these bank failures point to the need for new regulations. A similar debate ensued after the 2008 financial crisis, and it led to a package of banking reforms known as the Dodd-Frank Act, named for its lead co-sponsors. One of them was Barney Frank, a former Democratic congressman from Massachusetts who chaired the House Financial Services Committee. More recently, he also served

on the board of Signature Bank, which failed this weekend. NPR's Juana Summers caught up with him to get his thoughts on what went wrong. In an op-ed for the New York Times, Senator Elizabeth Warren says that the recent bank failures, and I'm quoting here, are the direct result of leaders in Washington weakening the financial rules. And she is talking there specifically about the rollback of parts of your legislation, which was designed to avoid another financial crisis like the one in 2008. Those are rollbacks you supported. Are you having second thoughts about that now? No, I disagree. I didn't like that whole bill because there were parts of it in the housing discrimination area they didn't like. But no, I don't think there is any sign that the rollback caused a problem. In the first place,

the regulator who took the lead in closing Signature Bank was the financial regulator appointed for the state of New York. Their authority was in no way affected by the 2018 increase in the level of banks subject to the closest supervision. So whatever the regulator in New York decided to do could have been done before. Secondly, I was on the board of signature both before and after the change. And I can tell you personally, there was no diminution of regulation. 2018 didn't say no regulation or weak regulation. It said you wouldn't regulate a bank at 50 billion assets the same way you would regulate a bank at several trillion. But they were paying strong power to regulate.

I think the cause of this problem was crypto. The fact that, and it starts, if you notice, with FTX. There was no problem for years. And I think this is the regulators, particularly say in New York, sending a message to banks, crypto is toxic, stay away from it. And let me ask you about that.

I'm curious here if you see more failures coming, given what you've just said, or was there something specific about Signature that made it vulnerable to a situation like this, which you were saying you believe is largely because of cryptocurrency, which some would consider a risky bet? No. In the first place, I think you're going to see what the FDIC has done is to remove the two top operating offices of Signature and one semi-retired officer and left everybody else in place. You're not going to see any significant change either in the personnel or the business model. I think particularly with the New York people in the lead, they were saying, stay away from crypto. Now, we were doing crypto. We were doing it in a responsible way. But I think they still wanted to send the message after SBB in particular to say out of crypto.

If the federal government had announced on Friday the two things that are announced today, a liquidity facility for banks that are suffering from runs and a backup for guaranteeing that deposits above $250,000, Signature wouldn't have had a problem. Now, that is the one vulnerability we had. Signature is a business-oriented bank. We lend a lot to real estate, housing, and that meant we had a lot of large deposits. And I argued back in 2010 that the $250,000 guarantee limit for businesses was way too small. And in fact, Democrats in this time lobbied hard to get that thing here. We've got to be able to have a bank put money enough to coverage payrolls. And I know coming out of this-

If I may, our time is short here, so I just want to jump in for one second. You know, President Biden has said that he wants to strengthen banking regulations so that failures like what we've just seen with these two banks are less likely. In the time that we have left from your perch, do you think he is right? I don't know how much time is time left, but I don't like to be asked complicated questions and so low, but we have to do with it. Sir, do you think that the president is correct when he says he wants to strengthen these regulations to make these things less difficult? Yes. First of all, I think we need to strengthen the regulations on crypto, not just in banking, but through the SEC. Secondly, I think it's important for the stability of the country economically

and for fairness to workers, not banks, to make sure that companies can have insurance sufficient to cover their payrolls. So, yeah, we need, I think, not just general banking regulations, but we need specific regulation tightening up crypto. Former Congressman Barney Frank speaking with my colleague, Juana Summers. It's Consider This from NPR. I'm Ari Shapiro.