Troubles in Banking

Here in West Des Moines, at the corner of 19th and Vine is a four way stop. In the mornings it handles traffic heading north to Dowling Catholic High School and west to Valley High School, while east feeds into heavily trafficked Grand Avenue. It’s a busy place, but the only requirement it places upon drivers is the ability to count to three. Upon reaching your stop sign, wait for three cars to procced you, then resume your route. Easy enough for thirty or so years, but about ten years ago it stopped working well, and there have been a fair number of “incidents”. That in a nutshell is the banking crisis.

What happened was cell phones. Once everyone had smart phones, especially high school kids, the propensity of all four drivers to be looking up for the duration of their stay at the intersection diminished, and the “incidents” started accumulating.

Our recent bank failures have many reasons, one of them being bank managers failing in their responsibility to match deposit duration to portfolio duration. In a country with over 5,500 banks, it’s not unexpected that some banks will come up short in their responsibilities, but Silicon Valley Bank (SVB) was a large commercial bank whose accounting firm had just completed their audit and gave SVB a clean bill of health. Two weeks later, a bank with 88% of its deposits above the $250,000 FDIC limit, was caught with an especially large position in long term government bonds they couldn’t sell without realizing losses greater than the bank’s net worth. Apparently everyone took a day off in college when “duration risk” was discussed. Everyone at the FDIC, the Federal Reserve, KPMG and SVB.

Now about those cell phones. What’s new in this crisis was the speed of the withdrawals. Thanks to e-banking, once word of the problems hit the internet, with a few clicks of their cell phones, depositors began a rapid draw down of the bank’s deposits. Literally, billions exited the bank from depositors balancing their phones on their laps with less delay than required to order takeout. Apparently, after 30 plus years of electronic banking, no one saw that one coming.

A few blocks from my office is a series of roundabouts that have replaced the prior four way stops. A little annoying at times to navigate, but no one gets the option of turning their eyes off the road. Because of that, “incidents” have decreased greatly. Urban planners have a solution to their cell phone problem. The OCC not so much.