One of the great philosopher-artists of the 2000s and 2010s (though maybe not so much in recent years) once said, “No one man should have all that power,” and this nugget of wisdom has been ringing in my head over the past two weeks. In a Slack chat among prominent VCs and startup execs, Silicon Valley venture capitalist Peter Thiel orchestrated the beginnings of a bank run against one of the most influential banks and the financial backbone of the Bay Area tech scene, Silicon Valley Bank (SVB), ultimately bringing the bank to its knees within days.
What happened with Silicon Valley Bank? Because banks don’t keep all their deposits on hand — deposits are used to provide loans or to buy various securities like bonds — they rely on depositors not all coming for their bags at once. But occasionally, a wave of withdrawals leads to banks panicking and liquidating their assets to cover newly withdrawn deposits — sparking further hysteria as everyone races to get their money out. Then down goes the bank, sending shockwaves across the economy.
This is more or less what happened to Silicon Valley Bank after Thiel advised his portfolio companies to pull their deposits out of SVB. Over the weekend, the Federal Deposit Insurance Corporation (FDIC) intervened, closing the nation’s sixteenth-largest bank and forcing it to liquidate its assets and make depositors whole. In a couple days, we saw the largest bank failure since the Great Recession and the collapse of Washington Mutual.
Following the collapse of SVB, spooked depositors at Signature Bank rushed to withdraw $10 billion, triggering a federal closure of both banks to contain the potential contagion. Stocks across the financial sector then plummeted throughout the United States and across the pond. The year had already been a rough one for Credit Suisse, its stock price slumping even before the SVB-induced crash. But once the heat turned up and depositors started fleeing, the Swiss Central Bank stepped in to provide a $54 billion bailout to keep Switzerland’s largest bank afloat.
The Promise of Public Banks
In the subsequent days, the press watched the situation like a hawk. Who would be next? Were we in for another Great Recession? Would workers be able to get their next paychecks?
Yet the corporate media missed a key point: banks, when left to their own devices, will fail. SVB certainly wasn’t the first, and it won’t be the last. Since the Great Recession over 560 banks have failed in the United States, often followed by Wall Street titans swallowing up their assets. Banks that were too big to fail in 2008 have grown still larger as the financial sector becomes more and more concentrated. Regulations meant to constrain financial chicanery have proven too weak to the task.
So the question is, what do we do moving forward? Do we continue to let the vultures prey on their dying competitors? Will the government keep having to bail out reckless banks?
In recent years, momentum has been growing for a different solution: publicly owned banks. A first-in-the-nation piece of legislation, the Public Banking Act passed in California in 2019, authorizing cities and regions across the state to begin establishing public banks. Other cities and states have seen public banking gain traction in its wake. The aim is to provide a stable banking source that, free from the whims of private capital, can finance ordinary people and their communities’ various economic needs.
There is currently only one public bank in the United States: the Bank of North Dakota (BND), founded in 1919. In its century-long history, the BND has been one of the most reliable banks in the country, especially during times of crisis. It weathered the storm of 2008 and processed more Paycheck Protection Program (PPP) loans than any other bank in the country in 2020. Where private banks have failed catastrophically, the Bank of North Dakota has been the picture of security.
How do public banks work? First, they marshal public capital to directly finance things like public infrastructure. Second, public banks are banks for banks. This means that they can hold public revenues and other assets and service a variety of institutions, but their primary function is to help local banks provide better services on better terms for their own customers. Public banks’ most common application is partnering with local financial institutions to provide very low-interest loans, so that local institutions can then deliver more affordable services to their members — if they need help getting loans for building affordable housing, buying homes, or installing solar panels or electric stoves in their homes. Third, because public banks have a relatively small and stable depositor base and are required to meet much higher collateralization requirements, they are less prone to bank runs and much more likely to have the liquidity to cover their deposits.
Following the pandemic-induced recession of 2020, representatives Rashida Tlaib and Alexandria Ocasio-Cortez introduced the Public Banking Act, which cleared the way for state or municipal governments across the country to set up state public banks. Three years later, despite growing energy from progressive activists, economists, and elected officials, BND remains the only public bank in the United States.
One of the most crucial elements behind SVB’s collapse was its inability to liquidate its assets on hand, largely treasury bonds. Though treasury bonds are typically seen as safe and liquid investments, SVB made the unfortunate decision to invest a titanic portion of its portfolio into government debt during the pandemic. Rapid interest-rate hikes from the Federal Reserve rendered the old bills far less valuable than the current ones; SVB then had to race to sell off its bonds well below their face value. Wall Street watched and waited, knowing that it would be able to seize an opportunity to buy off the bank’s assets at a much larger discount should SVB fall.
If San Francisco and the East Bay had public banks in place, there would’ve been more tools available to extend a lifeline to depositors and partner with local financial institutions to prevent the bank’s collapse. In response to SVB’s inability to sell its stable yet unattractive bonds, a public bank could have bought them at par (face value), given SVB a loan, or even bought shares in the bank, thus injecting capital while acquiring an ownership stake in the currently privately owned bank. Or if those options weren’t feasible, a public bank could partner with local credit unions to buy SVB’s assets rather than letting Wall Street swallow them all up.
A First Step Toward Transformation
Earlier this week, my credit union sent an email assuring me that my deposits were safe — as a member-owned bank, it prioritizes liquidity and security above higher yields. My first thought was, “How many people are panicking at the news? How many are terrified that if they don’t race to the bank to withdraw all their money, it’ll vanish while bank executives run away with bonuses on the way out the door?”
The Great Recession happened a whole generation ago. Children born during it and shortly after are approaching middle- and high-school age now, my own child included. Still, nothing has been done to fundamentally reform our financial system.
Public banking is a step toward the kind of change we need — rather than setting ourselves up for a future where our governments are wholly dependent on, and regularly bail out, the private banks.