Strategies for encouraging a widespread revival of Main Street businesses through the implementation of universal deposit insurance.
The unique tradition of American banking which centers around providing services in specific sectors and production is facing more risk than ever before since the late 1990s. To save our local and regional banks, and to bring back industrial bankin[...]
In the '90s, Robert Hockett, now a banking lawyer and doctoral candidate, had a unique experience living in Kansas City. During this time, he was drawn to the world of banking on two fronts. First, he started an experimental 'shoebox bank' to help his homeless friends who were living "under a bridge". More information can be found in his book manuscript. Second, he noticed an odd occurrence in the local banks. Hockett's hipster days in Kansas City during the '90s were a formative experience in his career and will always stand out in his memory.
A small work crew was spotted atop a tall ladder near a bridge in a small town one morning, taking down a quaint sign with riverboat smokestacks and a paddle wheel and replacing it with a generic red, white, and blue sign reading "NationsBank." Two years later, the name changed to "Bank of America (BAC)," making it the second largest bank in the world by market-cap. Today, the town's state-focused banks are now all mere branches of one of the country's "Big 4" generic banks. This change of sign is a symbol of the transformation of the banking industry.
When the term 'globalization' was first introduced to the world, few people could have predicted the immense impact it would have on the world's economy. One such person was Dr. X, then a graduate student, who sensed the importance of the 'globalization' of finance and production, though he didn't fully understand its implications. Little did he know that this process would be the focus of his entire academic career. Dr. X has since dedicated his life to reversing the effects of 'globalization', without reverting back to the style of economy of the 1980s. His work has been widely acclaimed and has been a major contributor to the understanding of the global economy.
On a fateful day, a momentous development took place, one that would have far-reaching implications. But what was so particularly significant about it? To uncover that, we have to look back in time, to that fateful day and the events that transpired.
Throughout American history, the dispersed-banking tradition has proved to be a critical and lasting force in the nation's financial landscape. Despite the emergence of large banking centers like Philadelphia, Boston, and New York, their regional dominance has never been allowed to spread beyond those cities and interfere with the growth of other regions. As the population of the United States has grown and spread westward, many metropoles and their surrounding towns and rural environs, such as Charlotte, Atlanta, Chicago, St. Louis, New Orleans, Dallas, Houston, San Francisco, and many more, have seen the emergence of adequately large banking institutions. This dispersed-banking tradition has allowed for equitable financial opportunity and progress throughout the nation, and has allowed for the growth of many cities and towns that have otherwise been overlooked. The dispersed-banking tradition is a reflection of the nation's commitment to fairness and inclusivity and has been a powerful force in the American economy.
In the late 1990s, a monumental change to banking regulations took place that opened the door for banks to branch across state lines. This change was a stark contrast to the laws that had been in effect since the Civil War. According to the National Bank Act of 1863, all national banks were required to follow the rules of the states where they operated. The McFadden Act of 1927 reinforced the prohibition of interstate banking. With the late 1990s change, banks were granted the ability to branch across state lines, bringing a new level of regionalization and localization to the banking industry.
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed, revolutionizing the banking industry. This act allowed banks to be permitted to merge, cross state lines and grow with abandon no later than 1997. As a result of this act, banks began to grow and interstate branching was put into effect. In the years following, many signs of these changes were seen, such as at Boatmen's Bank. The Riegle-Neal Act allowed banks to expand and become larger than ever before, creating new opportunities for customers and the banking industry. This act was a catalyst for the banking industry and has had a lasting impact on the banking landscape.
In a swift move, Congress enacted the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which was signed into law by President Bill Clinton. This law compounded the trend of concentration initiated by the Riegle-Neal Act, which removed the Glass-Steagall separation of banking from securities dealing and insurance. With the passage of this law, the Riegle-Neal banks are now allowed to become massive financial conglomerates, offering 'one stop financial shopping' to consumers. This act is seen by many as a major milestone in financial history.
As banking conglomerates began to form, ordinary folk had little need for the wonders of modern banking, leading to a shift in the focus of banking from long-term investments in the real economy to speculation in secondary financial and tertiary derivatives markets. This shift had the effect of diminishing the importance of small local businesses and retail depositors in the eyes of the bankers. While banks still offer ordinary transaction accounts to retail depositors, the focus has shifted away from investing in the real economy and towards the potential for quick profits and losses in the financial markets. Recently, Cornell Law Professor Robert C. Hockett has been working with Senator Bernie Sanders to address this issue, with the aim of curbing the power of large banks and encouraging investment in the real economy.
The effects of financialization have been felt throughout history in numerous societies, from the fall of ancient Rome, to the waning of Spain under the Habsburg Dynasty, and to the industrial decline of the Netherlands and Great Britain. Now, experts are sounding the alarm that the same could be happening in the United States. Financialization, it turns out, is not only detrimental to economic productivity, but to political stability as well.
As more and more people ask "Why?", the answer is becoming increasingly clear.
This week, Silicon Valley Bank (SVB) has been in the spotlight for its financial troubles. Despite having a 'boring' asset portfolio comprised of loans to tech startups, Treasury securities, and AAA rated MBS, the bank was solvent and sound. However, SVB lacked deposit insurance for accounts over $250K, leaving it vulnerable to liquidity issues should the Federal Reserve raise interest rates suddenly. According to experts, the lack of deposit insurance is the root of SVB's current financial troubles, not the quality of its assets or any delinquencies or toxicity in its portfolio. By examining the history of banking and self-fulfilling prophecies, it is clear that SVB's vulnerabilities were rooted in the lack of insurance, not its ability to perform.
Silicon Valley Bank (SVB) has been hit with a double-whammy due to the Federal Reserve’s misdirected rate hikes led by Chairman Jay Powell - the largest and fastest since Paul Volcker’s hikes in the late 1970s. These hikes have caused a recession for the tech firms that have been SVB’s main depositors, resulting in fewer deposits coming in and more withdrawals going out. Simultaneously, the value of SVB’s treasury holdings has been diminished due to the necessity of higher yielding treasurys. This has made it increasingly difficult for SVB to match up their liabilities with their portfolio.
A revolutionary solution to our country's banking troubles has been proposed, one that could avert the hundreds of bank runs that are expected in the coming week and bring more secure, decentralized banking to the masses. The solution doesn't rely on repealing any existing laws, but rather capping Federal Deposit Insurance. The proposal is a radical shift from the banking practices of the 1990s and could bring about a new era of deconcentration, definancialization, and reindustrialization. It is an exciting prospect that could drastically benefit citizens and businesses alike. More details are expected to be released in the coming days, so stay tuned to get the latest information.
As the country looks to 'make America make again', Silicon Valley Bank's clientele alongside other productive industries are presented with counter-intuitive quandaries. A vast literature has been written on sector-specific and industrial banking that outlines all of the advantages these offer. This form of banking is thought to be the secret to America's successes in the 1990s, prior to the start of the financialization era. With the current confusions and roadblocks presented, the importance of sector-specific banking is being highlighted, in an effort to create a more geographically balanced market.
This week is an unprecedented one in the history of legislation—a brand-new bill taking up fewer pages than the Glass-Steagall Act of 1933, and even fewer than the massive Dodd-Frank Act of 2010. Last weekend, one determined individual drafted the bill, and it is expected to be enacted this week. This is a feat that even the most experienced legislators would find difficult to replicate, as it has taken nearly nine decades since Glass-Steagall to achieve. With this historic step, a new era of financial regulation is set to begin.
The Federal Deposit Insurance Corporation (FDIC) has announced an overhaul of its Deposit Insurance Fund, with the aim of ensuring financial security for consumers. The changes remove the caps on Federal Deposit Insurance, retain the risk-pricing of premia as required by law, and give FDIC the option of progressively pricing those premia as deposit amounts increase. In addition, the FDIC will now be required to continually assess premia, rather than only when the Deposit Insurance Fund falls below certain thresholds. This new policy, which had been described as “perversely procyclical” and “imprudent”, is intended to ensure a more consistent level of protection for consumers.
In a bold move, the United States is set to largely undo the concentration, financialization, and deindustrialization of the '90s. The country is looking to restore local responsiveness, nationwide community banking, and production. The aim is to make America make again, and they are doing it without having to overturn Riegle-Neal and Gramm-Leach-Bliley, two banking laws whose authors likely did not intend the current troubles the country is facing. This move is expected to have far-reaching implications and is a welcome sign to many.
The Federal Deposit Insurance Fund (FDIF) has a new Trustee charged with the responsibility of prudent management of the Fund. This individual is uniquely placed to assess sensible premia and make sure the Fund is safe and sound. In order to do this, the Trustee has proposed removing all coverage caps. This move is seen as a way to emphasize the importance of the Trustee's role and ensure the safety and soundness of the FDIF.