The Institution of Banking

Ryan Heshmati

May 05, 2023

John le Carre argues, "... bankers will always get away with whatever they can get away with." Of the occupations, perhaps they are near the most hated. Had Shakespeare grown up in a post-subprime mortgage crisis world, he might have quipped, "First, kill all the bankers!" With a series of major failures in recent years, most recently the failure of Silicon Valley Bank, the industry's less-than-optimal optics are understandable. To understand the banking industry today, one that in the United States is as old as the nation (the first American bank was founded in 1780), its recent past must be examined. 

To start, the Great Depression saw a series of collapses within banking. After the 1929 Stock Market Crash, faith in American institutions was rattled. Bank runs antagonized the nation during the early years of the Depression, with 1931 alone seeing runs in both Chicago and Boston. Finally, in 1933, President Roosevelt took action and signed the Emergency Banking Act to buy time (four days) for the government to restore confidence in American banking institutions. It worked. Once the holiday was over, depositors returned money to banks, and the stock market rallied. 

Between the 1980s and 1990s, the American banking system suffered another difficult period. A result of a variety of factors like deregulation and raised interest rates combating inflation, the Savings and Loans Crisis put almost one-third of savings and loan associations out of business. The period also involved fraud, most notably with Lincoln Savings and Loan. According to the Associated Press, Charles Keating, who ran Lincoln Savings and Loan, "…allegedly bilked Lincoln customers by selling them $200m of unsecured "junk" bonds," explaining that ultimately, "They became worthless when Keating's company became bankrupt." The impact of the broader crisis on the financial industry did not remain isolated to select savings and loan associations, as the FDIC ended up having to take action on well over one thousand banks. All said in done, the General Accounting Office's 1996 estimate puts the cost of the Savings and Loan Crisis at $160 billion.

The financial crisis of 2008 is another example of banking gone bad. As a result of reckless subprime mortgage lending, the financial system felt major shocks. Government action with bailouts of various forms prevented the intensification of the crisis to the point of completely taking down the banking system; however, the crisis was not without corporate casualties. Washington Mutual (WaMu) suffered the largest failure in American history, with assets of over $300 billion. 

The Silicon Valley Bank debacle is undoubtedly concerning. There is no telling whether the 2023 failures of banks are over, but history can be an important guide in navigating the waters. The banking system has survived the Great Depression, Savings & Loan Crisis, and the 2008 Financial Crisis; it seems reasonable to assert there exists a high likelihood this trend continues of resilience continue