Depositors want safety, borrowers want easy credit. Library of CongressĪnd bankers, unlike other businessmen, must always serve two masters.
In 1931, a run on the Bronx branch of the Bank of the United States in New York City caused the institution to collapse, joining a wave of other bank failures at the start of the Great Depression. When a bank goes broke, however, it can affect the personal economic well-being of nearly everyone in the community or even, if the bank is large enough, the entire country. If an ordinary business goes broke, it is a financial problem for the owners, the employees, and the creditors, who, usually being professionals, have no one to blame but themselves. Loans, on the other hand, are assets because they are owed to the bank. Cash on hand, for instance, is an asset in most enterprises it is usually a liability to a bank because it is owed to the depositors. While no one could dispute that our Constitution and our politics have been, on the whole, a triumphant success, American banking is perhaps the ultimate proof of Sir Winston Churchill’s contention that “democracy is the worst form of government except all those other forms that have been tried from time to time.”īanks are in the money business, and that, ipso facto, makes banking a very peculiar business indeed. Why should the richest and most productive capitalist economy on earth have such a dismal record in safeguarding a system so central to capitalism? The answer lies in the peculiar nature of the business we call banking, in our national history as a federal republic of sovereign states, and in our politics. In sharp contrast, Great Britain, whence most of American banking theory and practice comes, has had only a handful of major bank failures in over a hundred years. The two centuries since then have been marked by literally tens of thousands of bank failures in the U.S. had thousands of bank failures while Great Britain has had only a handful in the last hundred years?
The first American failure took place in Rhode Island in 1809, when a bank capitalized at forty-five dollars issued eight hundred thousand dollars in bank notes, a sum equal to more than seventeen thousand times the resources behind it. That’s why politicians want the bankers on their side and are thus predisposed to favor the bankers over the banking system. That’s why banks need constant watching.Īnd never forget that banks are in the money business. Once someone possesses the magic power to create money, the temptation to create too much is very strong. They are sometimes too agreeable to their friends, sometimes too optimistic, or too greedy, or dishonest. Greg Becker, the bank’s CEO, was one of the executives who successfully lobbied Congress for the relaxing the regulations.ĭespite the need to maintain an impeccable reputation, bankers are human. Presumably their officers were able to read balance sheets, but they failed to appropriately vet their own risk portfolio. Silicon Valley Bank was an institution focused on providing loans and services to earlier-stage high tech companies. Silicon Valley Bank was among the big banks that lobbied for the 2018 relaxation of regulations that might have saved them.
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