April 19, 2024

Silicon Valley Bank (SVB) and Signature Bank have recently collapsed, leaving countless account holders without their money.

SVB experienced a bank run on March 10, and since they did not have enough of their account holders’ money available, the bank was forced to shut down. Following this event, a large percentage of account holders at Signature Bank were afraid of the same results and performed a second bank run, causing the subsequent failure of a second bank institution on March 12, according to the Federal Deposit Insurance Corporation (FDIC).

Dr. Julianna Browning, professor of accounting, said this event was unexpected but inevitable.
She explained that the banks would have likely failed in the next few years due to poor investment decisions.

“It was a lot of things working together that eventually came to a head,” Browning said. “So part of it is the inflation and the subsequent rise in the interest rates by the federal government, and that caused some changes in the way that not only banks invest but on the returns that they were earning on their investments. I don’t know the details of the interest rates, but let’s say [SVB] invested in some bonds that were earning 2% interest and now there are bonds out there that earn 5-6% interest. So if they were to liquidate the bonds at a lower interest rate, they would have a loss, whereas the other bond would give them a higher return.”

Timothy Summers, senior accounting major, had a similar response, claiming that this event should spark a change in the banking industry.

“Banks are going to have to take a closer look at where they are putting their investments and whether or not they are diversified enough,” Summers said. “This could have been prevented if their stocks were spread out over multiple industries and markets. It’s also creating a high dependency upon the government.”

In a transcript released by the White House, President Joe Biden made an announcement that all the money, including that which the FDIC did not insure, would be reimbursed to account holders. This is not the first time this has happened, as the government ignored its previous cap of $100,000 during the Great Recession in 2008.

Richard Ardito, professor of business, raised the question of whether this enables the bank system to continue having major flaws in its business model.

“I think the question also comes back to whether our banking system is built to withstand tougher financial times,” Ardito said. “We have this thing called fractional reserve banking where essentially banks only hold about 10% of the money that they have on deposit. The rest is lent out or invested in some other way. So if more than 10% of the deposits are requested from the bank, there’s always going to be that issue that they’re not going to have the money to actually pay those people.”

Since larger banks have been bailed out multiple times, banks have little incentive to improve their operations, as the government will often help them in times of extreme hardships.

“There is one of two ways this can either lessen the trust in the banking industries or increase the trust and dependency of the government since they are taking care of the banks and the customers,” Summers said.

Even when banks are not bailed out, they are often absorbed or acquired by other banks, allowing the existing infrastructure of failed banks to survive and continue causing problems to account holders.

“Maybe those banks don’t exist the same way they did back then, but one way or another, they were absorbed into other banks,” Ardito said. “For example, Washington Mutual was absorbed into Chase.”
Ardito explained that continuing to save banks from their own mistakes could be costly in the long run.

“It’s kind of a double-edged sword,” Ardito said. “It’s one of those things where people maybe have a little bit more reassurance that their money and banks are safe, but at the same time that money has to come from somewhere.”

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