U.S. regulators and Wall Street financial institutions are scrambling to stabilize another bank, First Republic Bank, with plans to inject $30 billion into First Republic, following the collapse of Silicon Valley Bank (SVB) last week and subsequent government backing for SVB depositors above $250,000 (amounts below that are already covered by the Federal Deposit Insurance Corporation (FDIC)).

Barney Frank said Monday the banks’ problems are not a regulatory problem, but a liquidity problem. He also blamed crypto for the financial jitters. Frank was part of the massive financial regulation called Dodd-Frank and was on board of the Signature Bank, another troubled bank that collapsed, shuttered by regulators on Sunday, and also received a federal backstop for uninsured accounts. With all due respect, the former congressman is wrong. In many ways, this was a self-inflicted, government-engineered bank crisis created by inflation, which was fueled by Democrat-led, excessive government spending. 

That government spending in turn sparked generationally high inflation, which hurts poor families hardest. In order to cool the breaks on the wildfire inflation, the Federal Reserve raised interest rates to sky-high levels last year, which put many bank holdings underwater. The rising interest rates also made the economy more sluggish overall and less hospitable to startups.

The Wall Street Journal editorial board outlines what happened

Although their liabilities were backed by putatively safe assets like Treasury bonds, when interest rates rise the bonds that banks hold lose value. They have to be held to maturity or incur losses when sold.

SVB and Silvergate [a troubled, crypto-heavy bank] incurred steep losses as they sold bonds to compensate for fleeing deposits. 

SVB’s business model was more durable but still vulnerable to market shocks. Rising interest rates have made it hard for its startup clients to raise fresh equity. As its customers drew down deposits, SVB had to sell bonds at a loss. SVB disclosed this week that it had lost $1.8 billion on securities sales and would need to raise $2.25 billion in equity. 

This stoked fears of insolvency, which caused customers and investors to bolt. It was reportedly searching for a buyer on Friday, and we hope regulators didn’t pre-empt potential private investors by closing SVB so quickly on the same day.

By effectively guaranteeing deposits above $250K, the Biden administration is essentially creating a billionaire bailout for wealthy investors in various tech startups. Some respond to that charge by saying the support is for the customers themselves, not for the bank, per se. 

But the end result is that the supporting banks in the industry will charge higher fees to customers now to compensate for any bailout of these depositors. That could mean everyday, Main Street, middle-class Americans will be holding the bag for these tech titans.

SVB and Signature Bank donated primarily to Democrats in the past two election cycles before their collapse. In 2020, 96% of SVB contributions went to Democrats, Fox Business reported.

Not surprisingly, SVB was awarded an “A” Environmental Social Governance rating, but that obviously didn’t help them avoid calamity. It’s time for out-of-control government spending to stop, along with meaningless ESG virtue signaling that doesn’t help underlying business models.