Marana Opinion: Banks need regulation

The following is the opinion and analysis of the writer:

I spent 25 years working as a bank officer for a number of banks and then for the Federal Deposit Insurance Corporation (FDIC). I want you to understand that banks are different from other companies.

I experienced the waxing and waning of bank regulation in response to a well-funded push against government regulation of corporations. With the failure of Silicon Valley Bank we hear repeated verbiage against bank regulation. The blame is misplaced on interest rates, bad management and "wokeness."

The failure of Silicon Valley tech firms during the 1990 dot-com bubble did not cause a national economic collapse, while a massive pullout of deposits from Silicon Valley Bank (SVB) could. Because banks are different. They are chartered by the government to distribute and manage the national money supply. Cash in banks in the form of dollar deposits has a circulation value two or more times greater than the face value of the dollar deposited. It's called the "money multiplier" which works this way:

- You deposit $100 in a bank account.

- Regulations allow the bank to lend out a portion, say 80% or $80, keeping $20 in reserve for withdrawals.

- The borrower then uses the loan proceeds for paying payroll or buying materials.

- The payee deposits the $80 in their bank which can lend out $64, keeping just $16 in reserve.

And so on.

A Wikipedia chart shows a $100 cash deposit could yield $457.05 in deposits and $357.05 in loans with the collective banks holding $89.26 in cash reserves. This shortage of the original $100 could cause regulators to change the reserve requirement. The magic of the multiplying value of a dollar can only happen if the original depositors do not demand their cash back at once; i.e., a bank run. If the banks cannot cover all the panicked withdrawals, the depositors with balances over FDIC coverage could suffer the loss of their funds. The result would be a contraction of the money supply, a slowdown in the national economy, unemployment, default on loans, and a reduction in consumer spending.

For decades, bank failures due to the inability of banks to meet sudden withdrawal demands occurred cyclically in this country and eventually led to the Wall Street crash of 1929 and the economic depression that followed. In 1933, Franklin D. Roosevelt spearheaded the banking-reform legislation and the Glass-Steagall Act that formed the FDIC to protect deposits and separated banks that use deposits for loans from Wall Street investment banks that gamble on stocks and bonds. That regulation provided financial security for over 65 years.

A hot stock market caused deposit banks to complain they were being regulated out of the financial rewards of a capitalistic economy and they lobbied for elimination of the restrictions. Their efforts resulted in passage of the Gramm-Leach-Bliley Act of 1999 that removed the barrier between deposit banks and investment banks. Seeing the opportunity for larger profits and salaries, deposit bankers stopped being the George Baileys of "It's a Wonderful Life" and became the Gordon Gekkos of "Wall Street."

Within nine short years of gambling on markets, collateralizing mortgages, inventing complex financial products and paying themselves huge salaries, deposit banks crashed in 2008, losing billions and leaving many homeless.

In response, the Dodd-Frank Wall Street and Consumer Protection Act of 2010 restored some regulations. Just eight years later, capitalists again prevailed with the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act, once again removing those regulations and history was destined to repeat itself beginning with SVB.

Our economic well-being depends on sound bank regulation. We had it right in 1933. It is time we demand a return to the Glass-Steagall regulations. We cannot continue to privatize bank profits while shifting their losses to taxpayers through government bailouts to save us from economic collapse.