I served as the special assistant to Federal Deposit Insurance Corporation Chairman L. William Seidman during the savings and loan crisis in 1988, during which time we faced a run on the First Republic Bank Corporation of Texas and had to take action in some ways similar to what took place with Silicon Valley Bank to stabilize the banking system and protect all depositors. A few points from that experience:
First, as is the case with SVB, the Federal Reserve raising interest rates to fight inflation also destabilized the savings and loan sector, although these hikes took place in 1979 to 1980 and resulted in a restructuring of the relatively simple and safe thrift industry into a relatively unchecked and risk-taking sector that eventually collapsed in the late 1980s, generating very large losses. Interest rate increases are a powerful but sometimes problematic tool.
Second, with deposit insurance and a government backstop, it is critical to have strict regulation to prevent the market distortions that took place with SVB. We also saw these distortions with the collapse of the savings and loan sector.
Third, I can appreciate the Treasury Department’s announcement to delay the recognition of certain bank-asset losses for up to a year, but this does constitute regulatory forbearance, and it needs to be closely monitored to avoid generating even greater losses. During the savings and loan crisis, forbearance ended up swelling the sector losses.
Michael Lyon, Falls Church
In his March 19 op-ed, “Here comes capitalism without risk,” George F. Will attacked the “blithe thinking” and “certitudes” of President Bill Clinton and Sen. Daniel Patrick Moynihan (D-N.Y.) and also, for various things, President Biden, the National Institutes of Health, teachers unions, the Federal Reserve Board, Florida Gov. Ron DeSantis (R), Fox News host Tucker Carlson, British Prime Minister Neville Chamberlain and Adolf Hitler. Needless to say, false analogies, catastrophizing and red herrings do not shed light on recent developments in banking. Modern financial systems are highly complex, interrelated and regulated.
It is true that government intervention is necessary, from time to time, to maintain functioning financial systems, protect customers and prevent contagion. U.S. banks and other financial infrastructure have served (not without fault) the American public, and these systems have worked better than any others in the world. Have industry participants, executives and investors lost money with recent failures and higher interest rates? Of course. Were depositors (and, indirectly, customers of those depositors) protected at Silicon Valley and Signature banks? Yes. Does that mean the end of capitalism — or, as Mr. Will called it “profits private, losses socialized”? Hardly.
Martha Solt, Chevy Chase
Eugene Robinson’s March 17 op-ed, “If banks want to be rescued, they should accept regulation,” and every other essay on the current bank crisis have missed the point. Operating funds cannot always be available and transmitted as needed if held in an institution that covers the costs of doing so by lending. In other words, crises are inherent in the concept of banking that we hold dear.
Thorough and dispassionate study might reveal that the benefit to the public of financing enterprise by crisis-prone banking outweighs the loss to the public of making good on the deposits that the banks cannot cover. In that case, we, the public, should accept the burden. Otherwise, we must divide banks into two institutions. One would be a depository that would receive fees for receiving, holding and transmitting client funds as a service. The other kind of institution would function like a savings and loan bank. To earn interest, people would place money that they are willing to risk losing. Deposit insurance in its current form is superfluous for both institutions.
The third option is to cling to our illusions and point fingers when they are dashed.
Stephan Jalon, Silver Spring