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    Monday, April 15, 2024

    Bank regulation needed

    After Friday’s collapse of Silicon Valley Bank, big bankers are again looking to Washington with outstretched hands. We should be skeptical.

    It certainly makes sense for Washington to take emergency action to backstop the depositors of New York’s own Signature Bank, a collateral consequence of SVB’s flameout. Many are entities like small business and co-op boards that never intended to take on significant risk or game the markets and simply were looking for a place to park operational cash and reserves.

    Less sympathetic is the money in SVB, the darling of the risk-enthusiastic, over-leveraged Silicon Valley venture capital circuit — well, risk-enthusiastic and libertarian right up until the money disappeared, at which point the turn to looking at the feds for a bailout gave us whiplash.

    Banks are not islands and the interconnection of the financial system and the reaction of markets means that when one goes under, others are at risk. That’s how Signature went down. And the fire sale dumping of First Republic shares yesterday has put another bank on the edge.

    The typical SVB depositor is not your typical Christmas club saver. Think cash-strapped startups with inflated valuations and uncertain revenue streams.

    Still, stability and trust undergird the whole of our banking system, and it’s fine for the government to make the depositors — and just the depositors, no investors — whole for both banks, particularly given that it won’t be the taxpayer on the hook. Yet the cavalry shouldn’t ride in without strings attached. The biggest reason for this mess is the ill-advised 2018 banking deregulation law signed by then-President Trump, a deregulation trumpeted by many of the same people now demanding Uncle Sam save them.

    This should be taken as a clear signal that letting banks police themselves is not nor has ever been the right call. The current moment of leverage should be used by the administration to collar financial institutions that present a risk to the economy, and Congress should be lining up to enact stricter rules. What you reap, you shall sow.

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