Your Take: Bank failures, protection and regulation

Earlier this week, we asked the following questions of our Fulcrum community regarding recent turmoil in the financial sector:

• When banks fail, should investors be protected along with depositors?
• Do we have adequate regulation, and if not what do you suggest?

The impetus for these questions lie within the recent collapse of Silicon Valley Bank, a California banking institution notable for its colossal presence in the tech startup industry. With a concoction of rising interest rates, increasing insolvency, and frantic deposit withdrawals, the bank officially shuttered its doors last week; subsequently being taken over by the federal government this past weekend.

Financial experts and self-proclaimed novices alike have weighed in on the issue - with varying opinions on the next steps necessary to stabilize a currently unnerved sector. While this issue has received national, and even international, news coverage, many agree that action must be taken to address the underlying volatilities to protect various sects of stakeholders. The question therefore remains: what is the most effective solution for a financial system to most acutely balance the needs of the people? Assuredly, this issue is entrenched in deep political, and even socio-economic, complexity.

Here is a sample of your thoughts. Responses have been edited for length and clarity.

No investors should not be protected, but depositors yes. Investors, if lied to, or if bank [executives] concealed pertinent information, can sue for fraud. The CEO can be sued personally if it is a public company under Sars-Oxley etc. - Barbara Boxer

After the Dodd-Frank reforms were enacted, we were led to believe that the banking system was insulated from systemic risks. Now we are discovering that even mid-size banks can cause systemic risks. If that’s true, regulations should be strengthened, not weakened, so that poorly run banks that are overly concentrated in one industry cannot threaten the system and require government intervention beyond standard FDIC protection. Companies and individuals doing business depositing funds beyond those protected by the FDIC should also understand the risk they are taking and not expect government support. - Ken Lawler

It seems unreasonable that investors should be protected from the risk of losing their money, there would be no incentive to weigh risk in the purchase price and no incentive to require the bank to do anything other than maximize profits. Their interests would be at odds with the interests of the depositors. There is obviously inadequate legislation otherwise we wouldn't find ourselves in this situation again and again. I don't know what regulation would be suitable but intuitively I feel that the speculative part of a bank should be separate from the normal deposits side. - Cris Delisle

No. Those people are investing in a business and if other businesses go broke, their investors lose their money. Why should they be treated differently? - William Bublitz

Thanks for the opportunity to comment. After Dodd Frank measures and 15 years of strong economic growth our banking system is certainly stronger now than before the 2008 crisis. It seems that SVB's situation was somewhat unique in that it specialized in new and high tech accounts with potentially more severe movements of larger deposits and withdrawals. While there are likely many factors contributing to this failure, on the surface management failed to exercise appropriate controls of its investment portfolio, leading to the inability to meet demands on its liquidity. The idea of bailing out other than insured depositors, is contrary to the principles of our capitalist system. - Anonymous

While I think it depends on the circumstances, I would argue that the investors need to have some expectation of uncertainty (that is why they invested in a potential growth corporation rather than in a safer investment - they wanted more money). My husband and I look at each other every time this discussion shows up on the news media (we mostly listen to NPR and watch PBS, but we also watch local news) and think - diversification? Duh? This is not rocket science and it seems as if people in charge should bear some responsibility for poor decisions. - Rebecca Theobald

The issue with SVB appears to be a careless management issue. Investors should not be protected, and depositors should be protected to the limits of the FDIC stated coverage. Not more. The bank suffered from not having appropriate risk management for the asset/liability portfolio. It also may have suffered from poor diversification of the source of both the depositor base and the loan portfolio. These are manageable risks and should have been dealt with by senior management and should have been flagged by regulators. While they should have been flagged by regulators, that does not mean that we don’t have sufficient regulation of our banking system. It means that we have weak enforcement and oversight by banking regulators. - Erik Olsen

The reason that businesses take the types of risks associated with these failures is that they tried to maximize the return to investors, because the investors demanded it. In other words, they took the risk and it didn't pan out. The public should not bail them out, since the public didn't reap the rewards. The more that investors realize that they are taking a risk, the more they will select safer investments and the business that they invest in will accommodate their newfound risk aversion. Decades ago, banks paid far more interest on deposit accounts. I distinctly remember banks advertising 4 to 4 1/2 percent interest on passbook accounts in the early 1960s. Perhaps if banks prioritized their depositors/customers, they would take less risk, even if that risk involved only investing in long term, "safe" bonds. The time value of money was a major topic in my MBA classes in the 1980s. - Michael D Williams

I do not know enough about this particular bank issue, but banks operate to make money and profits for shareholders and investors. They should be looking out for their depositors but they seem to be willing to take risks that have impacted investors and depositors. Seems like regulators should be doing what they are supposed to be doing – watching the store. - Rhoda Schermer

When banks fail only depositors should be protected. Investors should have incentive to make sure those in power are held accountable for their actions. As for regulations, I am not sure what should be done, but apparently something. - Kenneth Balmes

During times like this, I have issues with the media. Because this story has a salacious look and feel, I think the media does not take the time, nor seem to have a sense of responsibility to be accurate and measured in their coverage. Too much casual use of the word bailout. Given the US government is only covering investor losses, main street is being insured for the full amount (not the $250K max) of their deposits, and irresponsible management is slated for pink slips is a satisfying resolution. - Mikki Shull

No. Shareholders bear the responsibility to hold management accountable. Shareholders with the largest holdings put board members on the board to vote their shares. Bailing them out removes discipline from the market. If little wage earners get fired and pay for their mistakes in this system, shareholders, especially the largest ones with the most power to buy politicians to write these bailouts, need to pay the price for their mistakes, too! This is a fundamental injustice de facto encoded in our system's hidden biases. Their influences are outsized, their mistakes, carelessness, thoughtlessness can cause systemic problems for all of u s. Depositors and employees should get support. But, not shareholders. - Brett Barndt

My take is that every situation is different in terms of culpability and impacts if nothing is done. In this case, the bank's leaders stretched thin on long term bonds, and failed to balance or insure the risk. And many depositors will have bankrupt businesses with significant impact. So, the response is appropriate: fire the execs, make the depositors whole from FDIC funds, and the investors didn't monitor the people hired..who also cashed out days before. But, 2007-8 was different. A pan-banking catastrophe was caused by some, but affected others anyway. It required a pan system response. But, the response failed in accountability, because bonuses still happened, and bad decision makers got bailed out. The question is about transparency and reporting, and covering risk. - James Ferguson

This was a bit about neglect management, a bit about irresponsible private equity firms, and a bit about disregard regarding the effects of such rapid rate increases on the banking system. Smaller banks (and their customers) should not have to pay for covering problems with larger banks. Larger banks are needed but should put more in the system to protect those larger depositors. - Martha Stamper

It appears to me that mixing retail banking with venture capital needs closer scrutiny. But, the failure of this particular bank is not an indictment against the US banking system in any way. This fear of a collapse of the banking system is not yet justified. Let’s wait and see if the other shoe drops. - Ken Wilkerson

I do not think investors in failed banks should be protected. I'm sure this will be a hardship for a few investors and a setback for the rest of them - but it was their choice. (I will say the same thing when we were bitten in 2008 by the collapse of Lehman Bros and Washington Mutual; we didn't like it, but it was our choice.) - John Wright

Seems like investors should be protected along with depositors, as I don’t think either group made the decisions that caused banks to fail. I wish I understood the banking system better, however. If investors are enmeshed with lobbyists and those who are making destructive decisions, then yes, they should be accountable for that. I remember the people and financial institutions that caused the last big financial set of failures being rewarded with huge sums of money in order to save the system; it made sense because they were trying to avoid the inevitable negative effects from percolating down to Main Street. After that debacle of injustice, it is doubly critical to find some way to hold accountable those who exploit and endanger the system (made of people) separate from anything that would drag down the majority of us, who are struggling to survive already. In general, I’d say don’t penalize those who invest or those who deposit. From my admittedly ground-level understanding of the financial world, we need both groups. - Lorna M. Hartman

Reinstating the Glass-Steagall Act is the floor, not the ceiling. Our antitrust laws are rusty & dusty from neglect. Too-big-to-fail is a good criterion to identify a business that should have been broken up long ago - Tony Vazquez

The United States has had adequate banking regulations in place, that is, until after the 2016 elections, when the Trump administration worked to deregulate them and diminish oversight. The current administration is working to restore that failing. - Fredric Bohm

I want banks to be boring. Preferably bringing back the Glass-Steagall rules where deposits and investment holdings were kept separate by banks. So investment risks were separate from depositor risk. - Nick Radonic