Planet Money - Your banking questions, answered

Episode Date: April 8, 2023

It's been a month since the collapse of Silicon Valley Bank touched off the worst episode of banking turmoil since 2008. While the financial system appears to have stabilized, we're still reckoning with what happened. Regulators are getting dragged before Congress. The Federal Reserve and the FDIC have promised reports on what went wrong with bank oversight. And judging by our inbox, you, our listeners, have a lot of lingering questions.Questions like: Was it a bailout? Where were the regulators? Is it over yet? And what about those other banks that were teetering on the edge?Today on the show, some answers for you.This episode was produced by Sam Yellowhorse Kesler with help from Willa Rubin. It was engineered by Brian Jarboe. It was fact-checked by Sierra Juarez and edited by Molly Messick. Jess Jiang is our acting executive producer. Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. It's been exactly four weeks since government officials walked into Silicon Valley Bank and took it over. And wow, what a month it has been. I mean, yes, this is the biggest banking mess since 2008. And to try to slow or stop contagion to other banks, the federal government took some pretty extraordinary measures. So far, those measures seem to have worked, but still regulators are being dragged before Congress for questioning. The Federal Reserve and the FDIC are working on reports about what went wrong with oversight. That'll be released next month. It's one of those news

stories that is so dramatic that it's captured the public's attention. It's made us dive into the little details, details that, turns out, matter a lot to the larger economy. And we, and judging by our inbox, you still have a lot of questions. Hello and welcome to Planet Money. I'm Nick Fountain. I'm Amanda Aronchik, and it is time to open the phone line to figure out the answers to some pretty big questions, some yours, some of our own, about banks and about this month of banking drama. Because this whole mess really has us rethinking a lot about how the banking system works and doesn't work. Today on the show, some big questions. Was it a bailout? Where were the regulators? And hey, is this over? What about those other banks that were teetering on the edge? Okay, for our first question, we have brought in a very special guest all the way from the Indicator podcast.

Ladies and gentlemen, Waylon Wong. Hello. Yes, I've traveled so far. Thank you so much for coming. Very happy to do it. All right, Waylon, this question has to do with deposit insurance and specifically the amount of money in your bank account that is insured by the government if your bank fails. The question comes from Jet Thomas. amount of money in your bank account that is insured by the government if your bank fails. The question comes from Jet Thomas. When was the $250,000 limit established and why was it $250,000? Also, a justification must have been made at the time about the $250,000. What was it? Thanks.

Yes, I love this question. And I talked to someone who knows the answer to it. But first, let's just do a little historical rundown of how we got here. There is nothing we love more than a romp through time. Waylon, take it away. have been around since the 1930s. They start with the Banking Act of 1933, which came out of the bank failures of the Great Depression. And it's important to remember that this was a brilliant innovation. Banks were failing because of bank runs. And this new insurance meant that people didn't need to literally run to the bank to withdraw their money because they knew it was safe. It was insured. It's kind of hard to imagine modern banking without deposit insurance, right? Yeah. It's like we just completely take it for granted today. And at first, the insurance limit was $2,500 and it's gone up over time. Congress gets to set the level and Congress historically adjusts it usually at moments when banks are under pressure or there's been a lot of inflation.

So like it sat at $100K from 1980 all the way up to 2008. And that's when it got bumped up to the current number, $250,000. Right. But Jet's question is why $250,000? What makes that number so special? Did congressional economists decide that below that you were just a normal person and that above that you're probably financially savvy enough to be doing some due diligence on your own bank? I'm dying to know. Okay. So recently I called up Aaron Klein. He's at the Brookings Institution. And during the Great

Recession, he was at the Senate Banking Committee and then the Treasury Department. So he was right in the middle of things when they were trying to save the banking system. And I put the $250,000 question to Aaron. How did the FDIC insurance amount of $250,000 per depositor get established? Was it arbitrary or was there a particular reason? Oh, this is a good story. And it's not one that's been widely told. Honestly, I got the feeling that Aaron is always kind of hoping someone will ask him this question about FGC insurance. This is the reason he leaves his home is so somebody will ask this question. Oh, yeah. Yeah. He just bounds out of bed like today could be it. Could be my lucky day. I would love to tell you that it was subject to rigorous analysis, debate.

There were conferences and somebody wanted two, somebody wanted three. They cut in the middle. None of that. All right. Here's the story. During the financial crisis, Aaron was part of a group that hammered out a proposal for what became known as TARP, the Program for Bailing Out the Banks. And it's this big, comprehensive 30-page thing. It's been negotiated at the highest levels. And then...

The House of Representatives went to vote on it, and they voted it down in a shocking vote. Yeah, no, I see you clutching your pearls. It was so shocking that the Dow Jones Industrial Average recorded its biggest closing point drop in history. In history! That is wow. In history. That is bad. Yeah, it was pretty bad. It was pretty bad. We had no plan B.

And we sat down and we said, well, we have to get the votes. So people started brainstorming, what can we put in this bill to get political support for it? Someone said, why don't we raise the deposit insurance limit, which hadn't been raised since 1980 when they more than doubled it from 40 to 100. But what if we pump up this 100 number to 250, instill a little more confidence in the banking system, and give it as a sweetener, as a political sweetener to try and get more votes? So they bumped the limit from 100k to 250k, not because there was an acute crisis of bank runs, but to insert some

supposedly populist measures into a pretty unpopular bill. And when the bill came back up for a revote? No hearings, no debate, no big question. And it passes the Senate. The House passes it word for word. President signs it right away and they go to, you know, saving the financial system. So that 250, like why 250? Do we know the answer to that? So 250, you know, it's this number that's two and a half times larger than the previous limit of 100, which matches the magnitude of the increase they did last time when they went from 40 to 100. And Aaron says people like numbers that end in 50. So it's just a win-win. And that's how we got the number we have today until Congress decides to raise it again. Which might be coming

soon. TBD. People are calling for it. So we'll see. Maybe again another two and a half times. TBD. People are calling for it, so we'll see. Maybe again another two and a half times. Waylon, that was an amazing story. Thank you for bringing it to us. Thanks. It was my pleasure.

So our next question is related to our last question. It comes from listener Claire Coddington. Hi, my name is Claire. I have a question for Planet Money. If the Fed is stepping in and making clients whole, how is that different than a bailout? And will taxpayers eventually be paying for this? Thanks, Claire. So this question is about the response to the bank failures. A bunch of people and businesses had a lot more than $250,000 in their bank accounts.

So more than the FDIC insurers. And yet, the government still came in and said, don't worry, you'll get all of your money back. And one question is, like, why? Did officials know something that we didn't about just how precarious and on the verge of collapse the whole system was? Or were they helping a bunch of pretty rich people

with very big megaphones who had a lot to lose if the banks failed? Either way, doesn't look good. Right. And either way, we are left with this question. Was it a bailout? So for this, we went to Columbia University law professor Kate Judge. Kate says when a bank has to be shut down, there's a usual way that this is done. Most of the time, the FDIC, when it's winding up a failed bank,

it has an obligation to wind up the failed bank in a way that minimizes the cost to the deposit insurance fund. The deposit insurance fund. The deposit insurance fund is this pot of money paid into by all of the banks. And it's the amount of money the FDIC thinks that it'll need to back up the banking system. At the moment, that amount is about $130 billion. And the FDIC generally does everything it can to not dip into that pot. But with these bank failures, officials decided they really had to dip in.

So there was the invocation of what is called the systemic risk exception. Yeah, basically the government looked at this situation and went, whoa, this is exceptionally risky. And they took $22.5 billion from that insurance fund to cover potential losses at the banks. So is this or is this not a bailout? Yes and no. Anytime you have stakeholders who are being protected by the government and being made whole, where the default rules say you're supposed to take a loss in this event, you effectively have a bailout. So on the one hand, yes, the government stepped in, made sure that people didn't lose money even if they had more than that $250,000 in one account. Kate says, technically, that's a bailout. On the other hand, very often when we talk about bailouts, we talk about interventions where the government goes in and takes effectively

a failed institution and props it up and lets it keep operating in a way that not only protects all those uninsured depositors, but you're very often protecting the other creditors, shareholders, you're very often protecting management. And so you're protecting a much broader group of people. Yeah, that kind of bailout is not what happened here. Shareholders and creditors lost a bunch of money that they had invested in these banks, And bank management was kind of publicly humiliated. And they were fired. So this isn't the type of bailout that we saw in 2008. In 2008, management made huge bonuses.

A lot of CEOs kept their jobs. Many shareholders of the big banks, even they, did just fine, thank you very much. People hated those bailouts. Remember the Tea Party and Occupy Wall Street? So now there is a lot of skepticism anytime government money goes to the banking system. Right, so back to Claire's question. Even though this is not a 2008-style bailout, will the cost of insuring all those giant deposits hit taxpayers in the end?

So no, it's not going to come directly from taxpayers. But that doesn't mean that businesses and ordinary Americans won't incur some of the costs of this decision. Right. So Kate says what's going to happen next, the FDIC needs to refill its money pot. And they're going to do this by making the banks pay in. So at the moment, taxpayers will not be hit directly. But people and businesses with bank

accounts, it is possible that they'll end up paying in some small way down the road. Next question. Where were the regulators in all of this? We poked at this question a little in our show right after the collapse of Silicon Valley Bank. And since then, I personally have not been able to get it out of my mind. Because clearly the bank was in a risky spot. And yet, seemingly regulators missed this. And so earlier this week, we called up an expert in the subject. Yep. I'm Peter Conte-Brown. I'm an associate professor of financial regulation at Wharton.

Fun. And you're writing the book on regulation, on supervision. Well, it's an important distinction. I'm writing a book on supervision, not regulation, as we'll see. The two are very, very different from each other. Yeah, let's get into that. What is regulation and what is supervision? Great. The way regulation usually works is there are laws on the books. If you are, say, a dry cleaner, it's your job to know what laws apply to your business and to follow those laws. If you don't, the government can punish you.

But banks are different. Banks are businesses. They want to take bets with our money and make profits. Banks are businesses. They want to take bets with our money and make profits. But since banks are so important to the economy that sometimes they get rescued by the federal government, we don't just put laws on the books and say, it's your job to follow them. We also install people, government employees inside of banks to sniff around and stop bad things before they happen. This is supervision, making sure banks don't take such risky bets that they blow up the whole system. But the details of what supervisors do are hard to come by.

Is this one of like the most secretive jobs in America? Yes. Yes. You know, the government treats it like it's the nuclear codes. They don't let anybody review it. There is a reason this is all so secret. And that's because banking supervisors are tasked with maintaining the safety and the soundness of the banking system. And if their communications with bankers saying, I don't know, fix your liquidity ratios right now were to leak, that would not be good for either the safety or the soundness of the banking system. It would lead to bank runs. It would lead to panic. Peter says supervisors are sworn to secrecy. They cannot publicly disclose the things they are telling the banks.

And if they do... They can go to jail. The individual examiners can go to jail. I have FOIA'd stuff from decades ago always to be denied because it's confidential supervisory information. Decades ago it was still confidential. Oh, yeah, from the 20s. From the 20s? A century ago it's still confidential? A century ago. What?

Yeah, it's egregious. The work of the supervisors was like a black box, but Peter had spent years looking into it. So eventually he convinced the powers that be to let him sit down with rank and file supervisors. And he says what comes out when you talk to them is this is a pretty weird job. Remember, these are government employees responsible for searching for risky things that the banks might be doing. But that means they are showing up to the office alongside regular bank employees. Getting their lunch in the same cafeteria, but just with a different name badge,

with a different color around it. Some banks welcome these supervisors with open arms. Some of them literally give them the offices in the basement with no windows next to the leaky bathrooms. They'll pick up the phone and they'll call people. These meetings are very highly orchestrated. And all interactions are with an idea to saying to the bank, you've done well, you've passed the test, or I have some notes. I have some notes. As in, you got to do a little better here on your interest rate risk or capital ratios or your anti-money laundering program. And the special sauce that

makes supervisors supervisors and not regulators is in the past they were given wide authority, not just to enforce existing laws, but also to try to prevent banks from getting into messes. This is really key. And it means that at some points in the past, supervisors had wide discretion to ferret out risky behavior. Sometimes banks complain that supervisors beat them up with a raised eyebrow. So bankers will say, well, we're doing this. And a bank supervisor will raise an eyebrow. And the bankers are like, wait, should we not be doing that?

And that kind of relationship, that's bank supervision. Peter says that bankers understandably hate having people look over their shoulders, who wants that, as they work. Everybody hates that. Yes, and starting kind of a while back in the 60s and 70s, politicians started to agree with the bankers. And they started to say, maybe the supervisors should take a step back, focus less on sniffing out risky behavior

and more on making sure banks were following the right procedures. What's behind this shift is faith in the market. It's this idea that if banks are doing risky things, then their shareholders who have money at stake, they will notice and they'll punish the bank. And so supervisors' main role now should be making sure that all the boxes are checked and trusting that shareholders will take care of the rest. So Peter says the higher-ups told supervisors, We want you to be much more like accountants and compliance officers rather than a bloodhound searching out for inappropriate risks.

And did that work? I mean, 2008 crisis, right? It failed spectacularly. Exclamation point. Society wants its banking system to be safe, secure, prudent. Shareholders, their motivations are a little different. Sure, they want a stable banking system, but they also want to make some money,

and so they want to take some risks. You're basically saying that shareholders are more risk-seeking than we want the infrastructure of the entire economy to be risk-seeking. Yeah, that's exactly right. That's exactly right. So back to our obsession, this big question, where were the regulators? We now know supervisors were there. They were issuing letters saying, you got to fix this. The question was, did anyone care? Peter says he thinks that, for now at least, a month after the collapse of these banks with Congress holding hearings, people might actually care when supervisors raise their dreaded eyebrow. How long that will last? He's not so sure. In a minute. Can we chill now? Is this banking drama over?

According to certain data, the economy is doing great. According to certain headlines, a recession is coming. According to a lot of normal people, well, things would be okay if it weren't for inflation. And so the published data, the interpretation on aggregate of the published data, and then the lived experiences of individuals can all go in different directions. And an economy that looks so different to different people makes it that much harder to make policy. This phase of monetary policy tightening, this next several quarters, is the hardest in the entire tightening cycle that we've had. How policymakers are walking a tightrope.

That's in our recent bonus episode. Make sure to check it out if you're a Planet Money Plus listener. And if you're not, you can sign up at the link in our episode notes. We've got one more question. It's a big one. The big one. Are the banking troubles over? Is the contagion contained?

Do I need to keep being stressed out or can I go and watch Ted Lasso? Yeah, the immediate answer to this is if you look at measures of acute banking stress, things do look better. Bank stocks seem to be recovering. Banks aren't running to the Fed to borrow the way they were a few weeks ago. The are we on the precipice question seems resolved at least for now. But financial crises can build slowly. And Contagion did almost take down one other bank, First Republic. When there was a run on Silicon Valley Bank, a bunch of other mid-sized banks also looked pretty wobbly. First Republic's stock price started to plummet. Within a week, a bunch of the big banks got together and deposited $30 billion into First Republic's accounts,

just in case, to end the panic, stop the bank runs. So what can we learn from First Republic's bad month? Well, let's start with one of their customers. His name is Min Park. He and his partners invest money in restaurants and tech and real estate. And if it sounds like Min's outside, that's because he is. He and his partners invest money in restaurants and tech and real estate. And if it sounds like Min's outside, that's because he is. Yeah, I'm sitting in the Bay Area and enjoying a California spring day.

Lucky guy. Before Min was an investor, he was a banker himself. He actually met his wife while working at Citibank. They didn't realize that you guys found love at the bank. That's right. That's right. Yeah. If people are not having good luck with the dating apps, try Citibank. Oh, yeah. He jokes. He jokes. Anyway, 10 years ago, Min's wife got a job at First Republic. She was like, I love this bank.

I love the people. I love everything that they do for their clients. It's such a personal touch. And so Min moved all his banking there. And if you're wondering what a personal touch at a bank looks like, Min had two bankers assigned to his accounts. He could call them up pretty much any time. And when he and his wife were expecting their first baby, he let his bankers know ahead

of time. So like, I actually give them a heads up and I'm like, when am I allowed to open this type of account for my future child? And they were very patient with me. Like, you know, like, I can't open a credit card for a one-year-old, unfortunately, but yeah. So that is personal touch, even if the bank couldn't legally give a credit card to Min's new baby. That level of service, that is something First Republic is known for. It's part of their business model. The typical First Republic client is well-off but not super rich. They probably live on one of the coasts.

And the bank got a lot of those clients by offering really competitive rates on big mortgages. And then they would encourage those customers to bring all their banking and investments to First Republic. For years, that business model served them well. The bank and its founder have won a bunch of awards, top national bank, best private bank. Until they had the misfortune of being around the corner from and looking a lot like Silicon Valley Bank, that bank that had just suffered an historic bank run. At that moment, many First Republic depositors with more than $250,000 sitting in an account, scared they might lose a bunch of that, they start to move their money out. Todd Baker, a senior fellow at Columbia and a former banker himself, says what happened

over the past month felt like witnessing a random act of violence. First Republic, to some degree, was like the guy on the corner who gets winged when a drive-by shooting happens. He's saying First Republic could have been just fine. But once large deposits started going out the door, they were in trouble. And here's why. Todd says that apart from those big deposits, what First Republic has a lot of is mortgages. Most of its assets are single-family mortgages, multifamily mortgages, commercial real estate mortgages, and mortgage-backed securities. Yeah, and a lot of those mortgages are locked into very low interest rates. Remember, that was the whole pitch to the wealthy clients. Good mortgage rates, nice and low.

But with interest rates going up and all those mortgages locked in at low interest rates for years to come, that is not ideal. Because if First Republic were to, say, try to sell the mortgages to a hedge fund, why would the hedge fund buy something that's earning 2.5% when they could go buy a treasury bill for 4 or 5%? The market value for those mortgages is going down as interest rates go up. Now, in normal non-bank run times, this is not necessarily a problem. Sure, the bank might be less profitable for a while, but this is what banks do. They manage different timelines. How much money they have on hand right now, how much money they'll have on hand in the future. Different piles of money earning different amounts, balancing between assets and liabilities. A bank can operate forever, even if its assets are worth less than its liabilities,

because it's still earning from those assets. And this is the kind of surprising thing I learned from looking at the First Republic situation. A bank can look kind of bad on paper, but still be just fine. That is, unless all of a sudden a bunch of depositors pull out their money. Money that the bank was counting on. Todd says that if Silicon Valley Bank hadn't failed and if First Republic hadn't been dinged in the chaos, it would probably be just fine right now. But the thing about a bank failure is it makes everyone, the government, the regulators, the banking industry, the stock market, and of course, the customers, look closely. Now, a big part of shoring up the bank is keeping money in the bank, making sure that more customers don't take their money out and run. And so to convince their fellow depositors to stay, some of First Republic's most loyal

customers who loved that personal touch, they have been making a public show of support, posting on LinkedIn, taking to Twitter. That is where we found Min Park. Do you mind reading me the tweet? Yeah, of course. Very much rooting for First Republic. It has been transformative as a banking partner for us in launching our own independent small business journeys. But it's also a business relationship. Yes, Min tweeted his support, and he also looked

at his accounts, and he decided to move some money out of where he was keeping more than $250,000. It was other people's money earmarked for future investments. He just wants to be extra safe. So wait, the question was, is the contagion contained? Did we answer that? We do not want to answer that question. We don't want to attempt to predict the future. But we know that for now, the banking system, including First Republic, looks stable-ish. But everyone we talked to also said that the situation is still pretty fragile. Okay, that's it. Some answers to some big questions about the banking system.

If you have more questions about banks or anything else, really, send them our way. PlanetMoney at NPR.org. This episode was produced by Sam Yellow Horse Kessler with help from Willow Rubin. It was engineered by the great Brian Jarboe. It was fact-checked by Sierra Huarez and edited by Molly Messick. Jess Jang is our acting executive producer. Special thanks this week to Paul Sowell and Sean Venata, who is co-authoring that book with Peter Conte Brown about banking supervision. I'm Amanda Aronchik.

And I'm Nick Fountain. This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.