Bank Bailout
Critical Analysis
Based on the visual above, what was the value of the 2023 Silicon Valley Bank failure?
Based on the visual above, since 2001, what year had the most expensive bank failure?
Based on the visual above, since 2001, how many years had zero bank failures?
Based on the visual above, what was the total value of the assets lost when Silicon Valley Bank failed last week?
The failure of Silicon Valley Bank is complicated (this short explainer might help). Bank failures often happen because when customers deposit money into a bank, banks don’t actually just hold onto all of that money, Instead they invest it elsewhere, trusting that most people won’t all come for their money at the same time. Unfortunately, bank runs happen when people worry their bank is going to fail, rush to get their money out of the bank before it fails, which leaves the bank with insufficient funds to give to their customers, which causes more customers to panic, which leads others to try to withdraw their funds - one nasty panic-inducing bank-failing cycle. Basically, if no one panicked, most banks would not fail. Also, basically, if everyone panicked, almost every bank would fail. One way to stop banks from failing is to force them to keep a certain percentage of their deposits on hand in case customers need them. In fact, federal law does force banks to keep a certain amount of money on hand (that amount, depending on the size of the bank). Unfortunately, in the case of the three banks that failed this week, that amount of cash on hand was not high enough. Often one bank failure will lead to the failure of others. This is called contagion Why do you think that happens?
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system. The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. The FDIC insures deposits of up to $250,000 per depositor, per insured bank. In other words, if you deposit up to a quarter million dollars in a bank that fails, the FDIC will insure that you do not lose your money. Make a claim about why our government insures deposits.
The FDIC insures trillions of dollars of deposits in U.S. banks and thrifts - deposits in virtually every bank and savings association in the country. Some argue that the government must take a role in bailing out banks to stop the spread of failure to other banks. Others argue that the way capitalism works is that some banks survive and others fail, and that the government should play no role in supporting failed institutions. Make a claim about whether government should insure deposits.
Last week Silvergate bank failed, then Silicon Valley Bank, and most recently, Signature Bank, one of the two big US destinations for crypto companies. The morning after the Signature Bank failure, President Biden went on television trying to calm the run on banks. What other methods does the government have to try to calm consumers and stop bank failures?
In the aftermath of the 2008 financial crisis known as the great-recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) was passed to tighten regulations on banks and strengthen the financial system to prevent future financial collapses. In May 2018, President Trump signed into law a bill that rolled back some of the Dodd-Frank banking regulations and exempted some small and regional banks from the most stringent regulations and also loosens rules aimed at protecting the biggest banks from sudden collapse. Now some legislators are clamoring for stronger regulations on banks. How does this back and forth illustrate the concept of democracy?
Do you believe the government will stop the spread of contagion from the three failed banks or will more banks fail?
Learning Extension
Listen to this short NPR story about bank failure and the steps the government is taking to address further failures.
Action Extension
Contact President Joe Biden and tell him what he should do about the problems in the American financial sector.