5 Things We’ve Already Learned From the SVB Bank Run - Why Congress and regulators "need to take a holistic view of what’s wrong with our banking system."

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Although we are still feeling the aftershocks caused by the sudden collapse of Silicon Valley Bank in California and Signature Bank in New York, there are already lessons to learn and questions to ask as we deal with another increasingly common financial surprise.

1. Borrowing Facility Extended to Credit Unions

On Sunday evening, the Federal Reserve and the FDIC announced the creation of a new program that will allow both banks and credit unions to borrow against the par value of their investments for a period of up to one year. While the NCUA has been noticeably quiet, it’s important to know that credit unions are also eligible to participate in this program, which is apparently designed to enable financial institutions to sell collateral at a discount to meet a sudden run on deposits. Hopefully, few if any credit unions will need this help.

2. Let’s Make the Central Liquidity Fund Changes Permanent

Chairman Harper has told anyone who will listen that Congress should pass legislation making permanent recently expired changes to the NCUA’s Central Liquidity Facility. These changes made it easier for credit unions to get loans in times of economic stress and increased the amount of money that was available to help the industry. The events of the last few days have underscored that there is no good reason to deny a mature industry the ability to react to the unexpected.

3. NCUA’s Caution on Crypto Vindicated

I’ve said it before and I’ll say it again, the NCUA was right to take such a cautious approach when it came to permitting credit unions to provide services to the crypto industry.

4. Put Electronic Brakes on Bank Runs?

Whenever I think of bank runs, I think of the scene in “It’s a Wonderful Life” when Jimmy Stewart spots a crowd running toward the Bailey Saving and Loan, just as poor Jimmy and his saintly wife Donna Reed are about to leave on their honeymoon. In contrast, the modern bank run is epitomized by crashing computer networks as businesses go online to pull their funds from their accounts. What SVB’s demise has demonstrated is that modern bank runs are even quicker and more dramatic than their counterparts of the last century. We may need to consider putting automatic brakes on deposit withdrawals, the same way Wall Street automatically blocks trading if certain thresh holds are reached.

5. Who Elected the Federal Reserve?

In 1913, the Federal Reserve System was created with the esoteric but important goal of maximizing long-term economic growth by ensuring that there is adequate liquidity in the economy in times of stress. In contrast, the Fed is increasingly using its extraordinary powers in response to any economic downturn, irrespective of its severity. When the dust settles is it time to update this model? Simply put, if the American financial system is so fragile that it has to respond with emergency measures caused by the conservatorship of a large regional bank, then we need to take a holistic view of what’s wrong with our banking system as a whole. It’s bad enough that the largest banks are too big to fail, now we know that even smaller banks are too big to fail as well. Why does this matter? Because if your average consumer gets foreclosed on if he doesn’t pay his mortgage on time while some of the wealthiest people in America have the government rush in to protect their savings, then there is a question of fairness, which will only make it more difficult for people to believe in our government and economic system.

Henry Meier, Esq.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.