The collapses of three large US banks (Silicon Valley Bank, Signature Bank, and First Republic Bank) so far this year has certainly caught the attention of Federal Reserve and the Federal Deposit Insurance Corporation. On June 29, Fed chair said at a conference (without going into detail) that the failures “suggest a need to strengthen our supervision and regulation of institutions of the size of SVB.”
In reality, “supervision and regulation” — including the FDIC’s guarantee to make depositors whole should a bank fail — have proven themselves part of, not a solution to, the problem. As regulators jigger with the rules (and break those rules, as FDIC did in paying out more than the insured limits to SVB’s depositors), creative bankers work the angles in what amounts to an outrageously large casino operation.
The problem is something called “fractional reserve banking.”
When you deposit, say, $100 in a bank, the understanding is that you can withdraw the full $100 at any time.
But your bank doesn’t stick the $100 in a vault so that that it can hand it back to you on demand. Under the Fed’s “capital requirement” rules, somewhere between 90% and 93% of that money (depending on the bank’s size) gets loaned out, invested in bonds, etc. so that the bank makes money from your money.
Suppose some of those investments go underwater — borrowers default, bond interest rates fall. Or maybe the investments just aren’t very liquid — they can be turned into ready cash, but not quickly.
Now suppose you show up at the bank to collect your $100, and all the bank’s other customers are there too, queuing up to close out their accounts (maybe all of you heard the bank wasn’t doing well).
There are a thousand of you standing in line, with an average balance of $100, to make a nice even $100,000 being withdrawn. This is called a “bank run.”
But the bank only has $10,000 on hand and can’t readily lay hands on the other $90,000 it owes all of you.
At some point, the bank closes its doors and goes bankrupt (or sells itself to an institution with deeper pockets for a fraction of its assets’ prospective value). The bank has failed.
Sure, the FDIC will give you your $100 back, taking it out of “insurance premiums” paid by all banks (which is to say, by all banks’ customers).
But what if instead of three banks, it’s 300 banks or even 3,000 banks. Things could get very bad very quickly. Widespread panic at least, and maybe even full-on economic collapse.
Instead of “capital requirement” rules and “insurance” schemes to make fractional reserve banking “work,” we need banks that keep 100% of their deposits on hand instead of loaning or investing those deposits, taking their profits in fees for processing checks and debit card transactions.
Six states already provide for the chartering of “100% reserve” banks, but the Fed is resistant to the idea. And no wonder — in this casino operation, they’re ultimately the house, which always wins. The banks are the gamblers … and they’re gambling with your money.
Thomas L. Knapp (Twitter: @thomaslknapp) is director and senior news analyst at the William Lloyd Garrison Center for Libertarian Advocacy Journalism (thegarrisoncenter.org). He lives and works in north central Florida.