With the government response to the collapse of Silicon Valley Bank in March, the United States crossed one policy Rubicon. Now, we need to cross another.
By waiving the federal insurance limit of $250,000 and guaranteeing every dollar of bank deposits for SVB customers, the U.S. government has set the expectation that all deposits will be protected from bank failures—without regard to the behavior of the bank executives or the wealth of the bank’s clients. What was once a privilege of Wall Street’s too-big-to-fail megabanks is now a given for all banks.
Such a policy may work out splendidly for the country’s 5,500 or so banks. But if those banks behave recklessly while enjoying the security of government guarantees—something they’ve done with frustrating regularity—the cost to the rest of us will be immense. If the U.S. government, using taxpayer money, is now standing foursquare behind all bank deposits in the country, we, the people, should get something in return.
“At the end of the day, what has been shown is that the explicit guarantee extended to the globally systemic banks is now extended to everyone,” Renita Marcellin, legislative and advocacy director at my organization, Americans for Financial Reform, told The New York Times. “We have this implicit guarantee for everyone, but not the rules and regulations that should be paired with these guarantees.”
As what may become known as the “Banking Crisis of ’23” unfolds before our eyes, we need to advance a coherent vision of the values and measures needed for a just financial system.
A Vision for Justice in Finance
First, a just financial system requires a stable banking system. This value is seldom disputed in theory. Rules on supervision for safety and soundness date back to the Revolutionary era. But in practice, bankers and their allies in government constantly choose profit over prudence.
Second, banks must provide essential services—such as deposits, money transfers, and credit—on a universal basis, so that Black and Latino communities are no longer disproportionately “unbanked,” as we call those deprived of access to basic financial services.
Third, the federal government must preserve a strong role for regulatory agencies that protect consumers from abusive practices.
A Moment Ripe for Populism
It’s an opportune moment to articulate and advocate for a new vision of finance, since the deposit guarantees have highlighted what the public does for banks. On Bloomberg’s “Odd Lots” podcast recently, host Joe Weisenthal observed that a tougher approach to banks “feels more mainstream because of this tension between private profit in banking and the utility function that everyone expects.”
At the same time, public trust in banking has taken a hit. A March 2023 AP-NORC poll found only 10 percent of respondents had a “great deal of confidence” in “banks and financial institutions.” That number is unchanged since at least 2017. We often dwell on mistrust of government, but–look around, people! —voters really don’t trust banks, and they haven’t, by large margins, since at least the 2008 financial crisis. The moment is beyond ripe for a populist financial reform agenda.
We can get there with a judicious mix of public regulation, private competition, and structural changes that include public options. We need not lunge for utopian-sounding frauds (cryptocurrency) or heavy-handed state-dominated solutions (like nationalization) to create a sensible financial system.
The current policies of Joe Biden’s administration have emphasized incremental rather than structural changes to advance this progressive vision. The president has, so far, proposed rolling back Donald Trump-era regulations and insisting on accountability for the institutions that screwed up. It’s a start. But he should lean harder into the politics of cracking down on finance. For example, he should promote sweeping reform legislation that would break up the biggest banks, return to tougher regulation of mid-sized banks, and support small banks that serve Main Street.
Chances of enacting such legislation in this divided Congress are slim. The industry lobby is already blaming this crisis on everything but policy. The political system marinates in Wall Street money. But even if good legislation is doomed, a sustained fight will put critics of Wall Street on the right side of the issue in advance of 2024, and on the right side of American history.
Break Up the Banks
It’s been done before. Ninety years ago, Senator Carter Glass and Representative Henry Steagall tackled overmighty bank power with landmark legislation that separated commercial and investment banking. The idea was simple: make banks smaller, and separate risky activities from the essentials of taking deposits, moving money, and making loans. The step helped stabilize the system for a solid 50 years. Then we lost our way. In a series of actions in the 1990s, Congress repealed Glass-Steagall.
After the 2008 financial crisis, Congress enacted new regulatory reforms in the landmark Dodd-Frank law, but waved off structural changes like a new Glass-Steagall and a proposal to cap bank size. This failure to act forcefully came back to haunt policymakers this year when they allowed J.P. Morgan Chase to acquire First Republic Bank, thereby making the largest U.S. bank even larger. Imagine if, 15 years ago, the United States had created a robust landscape of mid-sized and smaller banks by breaking up the behemoths. There would be a lot more options for mergers.
Neel Kashkari, a protégé of former Treasury Secretary and Goldman Sachs CEO Hank Paulson, helped orchestrate the bank bailouts in 2008. Since then, he has nurtured the case for breaking up the too-big-to-fail banks, first as a gubernatorial candidate in California, then as head of the Minneapolis Federal Reserve Bank since 2016. The current banking crisis has put wind in the argument’s sails.
In 2016, Kashkari emphasized the need to shield the public from picking up the tab for the riskiest activities of big banks. Now, citing the inflow of money into larger banks and money market funds due to the new deposit guarantees, Kashkari is stressing the disadvantages that smaller banks face.
“We have to come up with a regulatory system that both ensures the soundness of our banking system but is also fair and even so the community banks and regional banks can thrive,” Kashkari told CBS’s “Face the Nation” in March. “We do not have that today.”
Biden turned the ship on consolidation dramatically with a new generation of antitrust enforcers. But some policymakers, under pressure from Wall Street lobbyists, are still too keen to regard mergers as the solution to the problem of financial instability. Treasury Secretary Janet Yellen, just last week, told major bank CEOs that regulators would be open to new mergers.
An ecosystem of smaller banks that are barred from engaging in the kind of speculative activities that prompted the original Glass-Steagall would serve a broad range of our shared values. Troubles at a single bank would not lead to systemic problems and smaller banks could focus on banking’s basic functions.
Moreover, former Representative Brad Miller, a North Carolina Democrat, once called the 2008 financial crisis “an extinction-level event” for Black wealth. A more stable system is a sine qua non for starting to close the racial wealth gap.
Provide Public Banking
Beyond bank breakups, Biden should champion a public option for banking akin to the public option that didn’t quite make it into Obamacare.
The United States had a public banking system (based in the post office) for over a half-century, from 1911 to 1966. The idea percolated among reformers in the decades before the Panic of 1907, when bank failures that wiped out savings cemented broad political support for its creation.
The equity arguments for a public banking option are strong, as are the prudential ones. Imagine a system where people can access simple services via the U.S. Postal Service, or one where individuals could open accounts at the Fed itself. (Public banking’s ironic end came about precisely because New Deal reforms all but eliminated ruinous bank failures.)
Interestingly, we are about to recreate a public option for one important part of the financial system: payments. In July, the Fed will launch FedNow, a real-time payment system. (It’s about time: other countries’ payment systems are faster and cheaper than anything in the United States.)
Small banks don’t like the current real-time payment system, which is controlled by their behemoth rivals. With the support of politicians who understand the crux of the issue, they pressured the Fed to build a real-time system. “It’s important, No. 1, that we have real-time payments, and I think it’s a public trust,” Senator Chris Van Hollen said. “It’s a mistake to allow that system to be under the control of the big banks.”
The existence of FedNow only fortifies the argument for some form of public banking. Small banks sought and won a system, free of Wall Street’s hammerlock, that secures universal access to real-time payments. How about the same for small folk, and not only small bankers?
Get Serious About Supervising Banks
We need to strengthen bank supervision. The events leading to this year’s banking crisis have thrown into sharp relief the need for a firmer approach, and the people who have stood in the way.
In the years after the 2008 crisis, the Fed cracked down under the leadership of Fed board member Dan Tarullo, who made a concerted effort to end an overly bank-friendly culture of supervision and regulation. But Tarullo had barely eight years, a short time to effect institutional change at an insular place like the Fed. Then two things arrived: Trump’s regulators and full Republican control of Congress.
Congress in 2018 ended the mandatory enhanced supervision that Dodd-Frank had required for banks with assets between $50 and $250 billion. So, instead of getting closer scrutiny as it exploded in size, SVB would lurch along until it failed.
Randal Quarles, Trump’s vice chair for supervision at the Fed, needed no encouragement. “Changing the tenor of supervision will probably actually be the biggest part of what it is that I do,” he said in 2017. Among other steps, Quarles codified into regulation, at the behest of the bank lobby, various measures that tied the hands of supervisors, for the purpose of binding his successors. Those rules “created 10,000 more steps” if a supervisor wanted to force change at a bank. SVB was, in effect, insulated from demands for change.
Quarles’ successor, the Biden appointee Michael Barr, has promised to turn the ship. But if he does not, a bolder step would involve stripping supervision and regulatory authority from the Fed (and from the Wall Street-friendly Office of the Comptroller of the Currency) and giving it to the Federal Deposit Insurance Corporation, steward of the deposit insurance fund. Responsibility for this fund, which this year took a $33 billion hit thanks to Silicon Valley Bank and First Republic, gives the FDIC strong incentives to push back against the pressure from the bank lobby to ease up.
Protect Consumer Protection
We must also do all we can on the legal front to protect the Consumer Financial Protection Bureau. In 2010, reformers won a massive victory for structural change in how we fight fraud in the financial system with the creation of the CFPB as part of the Dodd-Frank law. The 13-year-old agency has delivered $16 billion in relief to consumers in the form of restitution or cancelled debts.
But Wall Street and the payday lending industry have pushed to the Supreme Court an outrageous challenge to the agency’s funding mechanism —the destruction of the agency by any other name —that nonetheless has a chance with a right-wing majority that openly seeks opportunities to undermine the regulatory state. And Republicans are seeking to gut the agency via a slew of bills, a few with goals that some Democrats and one former Democrat —looking at you, Sen. Kyrsten Sinema—have occasionally shared.
Structural change is vital. That said, we can’t lose sight of the importance of incremental regulatory changes. The Banking Crisis of ’23 has laid bare the need to remedy regulatory rollback of the Trump era (notably on bank capital and liquidity). Regulators should finally complete rules that Congress ordered up 13 years ago that would deter executive pay packages that encourage the sort of reckless risk-taking that doomed SVB.
But since we have now experienced structural change in the form of expanded deposit insurance on one side of the equation, we need it on the other side, in the form of changes to the underlying structure of finance. Blaming deposit insurance itself, however much the rescue of SVB depositors sticks in the craw, would be precisely the wrong reaction to this year’s crisis.
The Equity of Deposit Insurance
The nearly 200-year history of deposit insurance encapsulates the ongoing need for a regulated banking system that truly serves the public.
In an illuminating dissertation, the historian Sarah Gates traced the origin of the nation’s first deposit insurance system in 1829. The idea had its political origins in the newfound political clout of yeoman farmers and small bankers of upstate New York and their outrage over being dragged down in panics originating with big-city banks. Their political patron was Governor (later President) Martin Van Buren.
Joshua Forman, Van Buren’s point man for the system’s creation, was more patrician than pitchfork populist. Forman nonetheless argued that banks have powers “so deeply affecting the interests of the community, they ought to be considered and treated as public institutions, intended as much for the public good, as the profit of the stockholders.”
A little more than a century later, Congress would finally create the FDIC as a coda to state programs that had come and gone. And, as Gates observed, in the case of the FDIC, Washington extended a specific benefit (deposit insurance of up to $2,500 at the time) equally, across all social divides, by leveraging political power “to balance the financial interests of the most powerful with the financial interests of average people.”
“Unlike many New Deal programs,” Gates wrote, “federal deposit insurance in 1933 protected every depositor in every member bank, no matter where they lived, where they banked, how they made their living, or how much money they made, regardless of race, creed, gender, or any other social barrier.”
The Importance of the Social Contract
Once Washington codified its role as the ultimate backstop for bank deposits, we could more easily view banks not as strictly private businesses, but something more akin to heavily regulated public utilities. Natural monopolies such as electricity or water typically deserve that status, but rendering banking consistent with democratic values need not entail monopoly.
Still, a firm public hand is entirely justified, not the least because banking is so essential that the government must assure the banking system’s integrity or risk vast damage to the nonfinancial economy. That Catch-22 choice enriches owners of banks. “Bank shareholders can claim ownership in valuable capital only by the grace of the powerful and continuous interventions of the state,” Alan White, a professor at CUNY School of Law, argued in a 2016 article, “Banks as Utilities.”
Even absent deposit insurance, bankers enjoy a privilege so fundamental it often escapes us: they originate money. The Federal Reserve works through banks by expanding or contracting credit to them. Banks with charters—governmental grants of authority—then lend to the broader public.
“Banking is based on a social contract: we the people, operating through our government, license bankers to create money, and we give them a variety of privileges in order to operate the financial system,” the scholars Ganesh Sitaraman and Ann Alstott wrote in their book, The Public Option. “In return, we expect a few things: a safe and sound banking system, consumer protections from fraud and deception, and public access to the banking sector.”
In other words, deposit insurance must be part of a larger regulatory regime that ensures banks serve the public and not just bank executives. The New Deal reforms met that standard, but today we have lost our way.
Silicon Valley unleashed a furious lobbying campaign to save SVB depositors, who were only insured to the FDIC maximum of $250,000. We later learned that 10 customers alone had $13.3 billion on deposit there. Welfare for tech millionaires, anyone?
Now ponder our tight-fisted approach that keeps student borrowers deeply in debt, with even mild relief facing tooth-and-nail opposition. We still need a sea change in how American politics treats banks and bankers, and that starts with structural change.
“We have banks that constantly break the rules and get into trouble, but we don’t make tougher rules and we don’t let banks fail in a truly free market,” said Porter McConnell, director of Take On Wall Street, a group that advocates for novel changes to the financial system. “We keep letting bank money stand in the way of structural change and all it does is pave the way for the next crisis.”
The true injustice of the moment lies not in extending deposit insurance but in the paucity of obligations that bankers face in return. If we’re going to put the full faith and credit of the United States behind the banks, then our democratically elected government needs to bring the ethos of deposit insurance to bear and give the rest of us the financial system we deserve.
Making banking the business of all Americans is not merely smart policy that would give us a more stable, fair, and equitable system. It embodies American values with a long and noble pedigree—ones we would do well to live out in our own time.