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The recent, quasi-epic failures of three mid-sized banks has generated not only digital reams of headlines, debates over Black Swan events, rending of garments and clutching of pearls, but the failures have also rebooted a quite necessary (and hopefully impactful) discussion: what is a bank?
A good, old-fashioned bank run meant literally running to a bank and demanding the sum of your deposited money – your bankbook and/or ledger waving menacingly above your head as you jostled for position at the counter.
That sort of bank run used to end with George Bailey looking to bail out his depositors by taking a long dive off a tall bridge. (Warning: gallows humor will prevail, henceforth.)
Then comes the internet. Take SVB’s laid-bare example: $44 billion can disappear from a bank in minutes, thanks to WiFi, mobile apps and the rampant, breakneck march of ‘progressive technology’.
Among the several takeaways, online gloating, mega-trolling and unthinkable amounts of financial autopsies, we are left to wrangle – yet again – with two main macroeconomic concerns:
- the role of regulation
- the need for competition
Mid-sized (aka regional) banks serve a purpose that too-big-to-fail financial dreadnought banks can fill, or should fill. Depositors and investors relied on Silicon Valley Bank because the bank knew the startup culture and world.
Big banks, by law, cannot hold more than 10 percent of the nation’s deposits/revenue/stored wealth. So when venture capitalists invest and fund startups, they will likely require those startups to avoid regional banks (like SVB) and require them to use TBTF* banks (like JPMorgan). And JPMorgan is most definitely not in the business of taking risks.
If you walk into JPMorgan (used almost solely as illustration here) with an idea, a strategy and a business plan – but no existing revenue and a sure-fired guarantee that you will blow through tens of millions of dollars (perhaps more) before you see a cent of profit … good luck with that. SVB saw the problem, the potential and the profitable opportunities and served its community well, for almost 40 years.
Regional banks often serve either niche, narrow-and-deep marketplaces or they serve smaller, demographic communities that may require special understanding of the local economics (farmers’ banks, I’m looking your way).
Without this nimble, and often profitable, purview, regional/mid-sized banks could disappear, leaving the massive, immense majority of banking (which means lines of credit) to the too-big-to-fail types. And that’s not good on two, equally important macro levels.
Lack of credit and risk means lack of innovation. Lack of that means lack of new products, industries and jobs. Lack of that means a breakdown of capitalism and the social order (that last one is only slightly exaggerated).
Banking regulators failed to enforce the laws on the books (however relaxed they are after 2018). Bank management failed - full stop. Politicians will begin their hand wringing over what should be done next, lacking any sort of self-reflection as to what they utterly screwed up along the way.
Better management, better regulatory enforcement and better diversity of lenders has led – and will again lead – to a more stable, growing and even thriving economy. If we set up the parameters to allow it to happen.
BONUS NERD LINK: track the Federal Reserve Bank’s itinerary here.