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After another week of turmoil, how safe are banks?

A member of staff cleaned ATMs at the headquarter of Credit Suisse bank in Zurich on Monday.FABRICE COFFRINI/AFP via Getty Images

The economist Betsey Stevenson once wrote: “I’ll never forget my children’s fear as they watched the bank run in ‘Mary Poppins.’”

And for many, the events of the last two weeks have evoked that sort of wide-eyed shock. If banks such as First Republic, Silicon Valley, Signature, and Credit Suisse can teeter or fall — albeit for different reasons — how safe is the system?

Some of the largest banks in the country have reportedly seen large inflows of cash, as individuals and companies seek higher ground. Though JPMorgan Chase, Bank of America, Citibank, and Wells Fargo already have assets of over a trillion dollars, they will likely expand further.

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Meanwhile, the Federal Reserve revealed that banks — they won’t say which ones — borrowed more than $150 billion from the central bank last week, breaking a record established during the 2008 financial crisis.

So, what are the consequences of these rapid shifts? First, we’re likely to see more consolidation and regulation. And second, there is the potential for more pain as banks adjust to a new, higher-interest-rate reality.

“It’s bad, in many ways,” says Simon Johnson, a professor of entrepreneurship at MIT and the former chief economist of the International Monetary Fund. “I think we worry about the quickness of this readjustment of deposits.”

But he was encouraged by the support that big banks offered First Republic — in the form of $30 billion in new deposits last week. And he believes that the United States should extend “deposit insurance to cover all depositors” and make “all depositors pay a fair insurance premium.” (The Federal Deposit Insurance Corp. currently insures up to $250,000 per depositor, and bank customers don’t have to pay for it.)

Clearly, neither the private sector nor the public sector wants contagion to spread. JPMorgan Chase CEO Jamie Dimon and Treasury Secretary Janet Yellen worked together to convince large banks to help First Republic, and new discussions to stabilize the bank were ongoing as of Monday afternoon. Even in tech circles — where libertarianism has historically thrived — government aid has been welcomed.

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“There’s the old saying: ‘There are no atheists in a foxhole, and no libertarians in a bank run,’” says Johnson. “But as soon as the bank run is over, the libertarians are like: ‘Get this government thing off my back, would you?’”

He argues that there’s a bigger question here, which has to be addressed: “Why do we get into these repeated crises?”

A First Republic Bank branch in New York on March 10, 2023Jeenah Moon/Bloomberg

Economist William Emmons, who retired last year after 27 years at the Federal Reserve Bank of St. Louis, wonders the same thing: Why do we lurch from failure to failure? Think Continental Illinois National Bank in 1984, the savings and loan crisis of the ‘80s and ‘90s, and Washington Mutual and IndyMac in 2008, just to name a few.

To Johnson, the answer is clear: “The incentives that we give people who run banks — small, medium, and large — are really screwed up. They get a lot of upside — really good compensation — when things are good. But the way they can juice their compensation is to take a lot of risk.” And even if that risk-taking results in disaster for bank leadership, “they walk away with a fortune, and we provide deposit insurance and other forms of support from the Federal Reserve.”

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He argues that there has to be better regulation and oversight around this sort of risk-taking, which can have ripple effects far beyond an individual bank.

Emmons, meanwhile, worries that beneath the recent volatility, there’s a fundamental economic problem we simply haven’t grappled with: Asset prices, of everything from stocks to real estate, have been too high for too long. And people now take inflated prices for granted, in large part because interest rates were low for such an extended period.

As the tech euphoria of the 1990s faded away, he argues, “[Federal Reserve Chair Alan] Greenspan basically inflated a housing bubble. That’s what’s going to keep the growth going. Well, that didn’t turn out well.”

“So after the financial crisis, the housing bubble crashes, the Fed — under [Ben] Bernanke now — lowers interest rates to zero and more or less convinces people they’re going to stay at zero forever. And guess what? The stock market takes off, and there’s a recovery in real estate prices.

“And after COVID, [Jerome] Powell just dusts off the playbook from the financial crisis and puts interest rates back to zero... And it’s gone on so long, there’s a natural tendency to believe that this is just the way things are. But I would say it’s been highly artificial.”

He worries about a major economic correction, and the strain that would put on the banking system.

If it were up to him, Emmons says, he would likely consolidate banking, curtail enormous pay packages, and make it more like a public utility. In Japan, he points out, banking is done at the post office.

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I asked if he worries about more bank failures ahead. His answer: “It’s certainly a reasonable scenario, yes.”

The Marriner S. Eccles Federal Reserve building in Washington, on Oct. 22, 2021.STEFANI REYNOLDS/NYT

Johnson argues that more oversight and regulation are critical to making sure the banking system operates smoothly, even though increased regulations might provoke resistance. Because every time the government swoops in, he says, it reinforces the notion that risk-taking is OK. And the health of communities rests on banks of all sizes being stable.

Kathleen Murphy, chief executive of the Massachusetts Bankers Association, believes the industry she represents is indeed stable, and that any problems are not systemic: “I wish there was a greater appreciation for this robust, very strong banking ecosystem that exists here in Massachusetts. ... Banks are stronger and more capitalized than they ever have been.”

People are talking with their bankers, Murphy says, which she encourages. “We want people to have confidence in the banking system, and there’s every reason that they should have even greater confidence than they’ve ever had.”

Anecdotally, Murphy says she’s hearing from bankers more about inflows than outflows, especially as former clients of SVB reallocate their funds.

Mari Anne Snow, CEO of Boston-based Eascra Biotech, has worked with banks of many sizes, and told me her concern “is that everything sits on top of confidence.”

Just after Silicon Valley Bank collapsed, Snow was at South by Southwest in Austin, as one of 40 companies chosen to pitch to industry luminaries. Some of the startups, she says, “had to stand up and pitch to hundreds of people, believing that their companies were insolvent and weren’t going to be able to pay payroll. Imagine what that’s like.”

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She believes that, though small banks can be more open to working with young companies, the events of the last couple weeks may make them “reevaluate their strategy and their exposure and who they do business with,” potentially leaving higher-risk businesses like hers in the cold.

Snow explained that she worked in financial services during the 2008 recession. And it didn’t instill a lot of confidence in her.

“That old ‘Wolf of Wall Street,’ ‘greed is good’ mentality has been internalized,” she says. “In 2008, 2009, 2010, there was a lot of fear. But once we got past that, everybody came roaring back, trying to get back to the good old days.”


Follow Kara Miller @karaemiller.