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Recent Bank Closures Signal Massive Changes in Future of American Finance

Travis Cunha

Mar 18, 2023

The United States' financial sector descended into another frenzy last week as the country witnessed the biggest bank failure since the 2007-2008 financial crisis, from which many Americans never recovered. Silicon Valley Bank (SVB), a midsized bank with $209 billion in assets collapsed, while tech and cryptocurrency-related banks saw dramatic drops in their stock prices: Silvergate, Signature, First Republic Bank all spiraled down, in part because the bonds they held have depreciated in value with the Fed's quick succession of interest rate hikes, and also due to the lingering effects of FTX's collapse under Sam Bankman-Fried.

The news was followed by recriminations and talk of another massive bailout, but just what does this latest financial crisis mean for the future of American banking? Was SVB's collapse part of capitalism's boom-and-bust cycle, or deliberately engineered to further consolidate the banking industry in the hands of a few major banks and the Federal Reserve? Founded in Santa Clara in 1983, Silicon Valley Bank found its niche catering to clients from the tech industry and by 2022 was funding 44% of public US venture and medical startups. The Northern California bank now holds the dubious distinction of being subject to the largest “bank run” in American history; a massive withdrawal of customer deposits as a result of panic that funds are no longer safe in their accounts.

The panic in this case ensued when Peter Thiel’s Founders Fund withdrew all funds from the bank after encountering problems with transferring funds into it. Within twenty-four hours, $42 billion was withdrawn from the bank, forcing SVB into a fire sale of its assets. In the notoriously opaque world of finance, why the bank failed appears fairly straightforward. Silicon Valley Bank used customer deposits to purchase government bonds as interest rates were kept at or near 0% for years following the 2008 financial crisis. Over the past year, as the Federal Reserve has quickly raised interest rates to around 5%, this normally safe and conservative investment in bonds increasingly became a liability. Last week when customers attempted to retrieve their funds, Silicon Valley Bank came up short and was taken over by the Federal Deposit Insurance Corporation (FDIC). SVB became the second-largest bank to collapse in United States history, after Washington Mutual’s fall amid the 2008 financial crisis.

While the midsized bank's collapse will likely redound to the benefit of JP Morgan Chase and Bank of America, even these banking giants saw their stocks drop this week. The Fed surely understood that raising interests rates would have the impact that it did on bondholders. Even after the most recent interest rate hike, Federal Reserve Chairman Jerome Powell implied that more would be needed to tame inflation. In his recent article, Marxist economist Michael Hudson writes, “There is now a flight to “cash,” to a safe haven – something even better than cash: U.S. Treasury securities. Despite the talk of Republicans refusing to raise the debt ceiling, the Treasury can always print the money to pay its bondholders. It looks like the Treasury will become the new depository of choice for those who have the financial resources. Bank deposits will fall. And with them, bank holdings of reserves at the Fed.”

The Fed's rate hikes, deliberate or not, strengthen dominance of the banking sector by behemoths like JP Morgan Chase and Bank of America. Most of the $42-billion-dollar exodus from SVB ended up in the six largest banks in the country. The Independent Community Bankers of America (ICBA), a trade organization which represents small banks, has voiced concern about the future of other regional banks, following news that they would be held responsible for reimbursing the FDIC for funds made available to any depositors unable to withdraw their funds. One representative of a large bank, speaking anonymously, compared small banks to salmon: “When you see deposits flooding out of small banks to large ones, it gets really tough to claim that large banks need more capital or liquidity. But salmon swim upstream, so perhaps the ICBA thinks it can too.” Even while receiving massive new deposits, the big banks backed by the FDIC still expect smaller banks to help foot the bill, which may mean further closures are imminent. Their loss will be the biggest banks' gain.

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