Banks rescued but concerns loom

The federal government's emergency efforts to affirm the resiliency of the U.S. banking system are likely to need a little more time before a verdict can be rendered on whether they halt the jitters caused by the recent failure of two banks.

The fast action by the U.S. Treasury, Federal Reserve, Federal Deposit Insurance Corporation, and state regulators to protect depositors in New York’s Signature Bank, which has seven branches on Long Island for its private customers, and in California’s Silicon Valley Bank, was inevitable.

But it shouldn’t have been necessary.

The feds will cover the full deposits in those banks, even beyond the $250,000 guarantee for an individual account — an expansion with its own risks — and will take steps to protect uninsured deposits at all other banks. The collapse of SVB, the nation's 16th-largest bank, meanwhile raises wider issues about how the nation regulates its banks — especially in the era of social media.

This past weekend saw an extraordinary two-day freakout over the faltering banks. A run of depositors seeking withdrawals prevented management from stabilizing holdings or selling the banks. Tech and crypto currency investors who proudly designed systems to get around government regulation now begged for a rescue, reaching a new level of hypocrisy.

The system needed calming, but the spin from federal regulators and President Joe Biden that taxpayers will not be on the hook is a little too clever. Sure, new assessments will be made on all banks to support these backstop insurance funds. But either shareholders of bank stocks will take a haircut on profits or the banks will find a way to pass the cost along to customers. Measures are needed that can better prevent mismanaged financial institutions from getting sick in the first place. 

On March 16, it will be 15 years since the feds bailed out investment bank Bear Stearns because it was too big to fail. How quickly we forgot those lessons. Some regulations put in place in 2010, after the industry's mortgage crisis fostered a recession, were mistakenly rolled back in 2018. Many banks escaped scrutiny because the threshold for review applied to institutions holding $250 billion rather than $50 billion in assets. The old rules required more warnings and stress tests to judge the health of banks as well as plans approved by regulators for dissolving those that run into trouble.

Since Friday, some smaller Long Island banks and credit unions saw many more customers than usual who wanted to withdraw their money. Those fears can spread and further shake the system. Regional and community banks are the lifeblood of our local economy. We will soon learn if any are at risk, but after Washington's actions, depositors are not.