Fordham University School of Law Professor Richard Squire gives a historical context to the recent banking crisis, the over-expansion of U.S. banks over time, and the regulation passed in the wake of past financial system failures.
SEANA SMITH: All right. Well, the recent collapse of Silicon Valley Bank and Signature Banks, they are in the headlines now. But they are just the latest in a long list of bank closures. Take a look at this chart here. It shows a number of bank failures over the last several years. And you can really see how many banks we have had, how many failed during the financial crisis alone.
So how did we get here? And is this week's chaos any different than what we've seen in the past? We want to talk, put this all into historical context for you about the banking system in America. And for that, we want to bring in Fordham Law Professor Richard Squire, as well as Yahoo Finance's David Hollerith. Great to see you both.
Professor, just put this into context for us. When we're talking about the failures that we've seen over the past week, how does that stack up to the failures we've seen in the past and just the sheer number of banks that we have today, over 4,000?
RICHARD SQUIRE: Sure. So there were more bank failures in the 2008 crisis. There's no doubt about that. But banking is inherently risky the way we do it in the developed world, where you have a bank that takes deposits that could leave at any time.
Depositors can demand deposit, meaning you can demand your money and get it back at any time. And then the bank turns around and invests the depositor money in long-term assets, in a 30-year mortgage or a 10-year Treasury bill or a loan to a business that might last a few years. So this is inherently a rickety structure. And when lots of depositors want to pull out their money at the same time, the bank becomes illiquid. It runs out of cash and often it fails.
So what we saw last week at SVB and, to a certain extent, at Signature, was a classic bank run. Now it has kind of a turbo charged quality to it because depositors can run faster than they ever did before. It's like fast and furious in reverse, where you can go from $42 billion to 0 in 6.2 seconds by online banking, electronic withdrawals, and so on. But the underlying dynamic and the underlying instability really dates back to the 19th century, if not before.
DAVID HOLLERITH: Yeah. And Richard, on that note, I was going to ask too, I was paying attention to the number of banks in other countries. China has about 187. This is as of the end of 2021. UK has 365. The EU has about 5,200. So it does vary per population size. But I was curious for the US, where does the debate start? You were getting at it.
RICHARD SQUIRE: Are you talking about the debate in terms of what's the right number of banks?
DAVID HOLLERITH: Yeah, or why so many versus a more consolidated approach.
RICHARD SQUIRE: Right. So there's a couple of stories there that I think are particular to the US that are historically interesting. One is that there was traditionally in the US, and we still have an aspect of this today, a kind of populist concern about big banks, especially big city banks. By the way, I don't mean Citibank, or Citigroup, I mean banks based in the big cities, in New York and Chicago, the financial centers.
And so during the Civil War, and then for a long time afterward, there were both federal and state laws that limited how big banks could be. Many of them said, you have to have just one building, you have to operate out of one building, so one bank branch. And others put restrictions on interstate banking. So there were lots of small, local banks. And the bankers had relationships with both the depositors and also with the people who received the loans, the mortgage holders and the businesses and so on.
So the scene in "It's a Wonderful Life," where the banker is talking to all the depositors lined up and knows all of them. I mean, that is very much an American story. And although those laws have largely been repealed, the branch banking laws, that legacy, I think, continues and we're still kind of living with an industry structure that reflects those origins.
It's also worth noting that FDI insurance subsidizes smaller banks. People would normally say, well, gee, I want to give a bank my money but I don't want to have it wiped out. And they would think, well, a big international bank is going to be made more stable, more diversified in its investments. Also now, it may be too big to fail. But a smaller bank that would not seem so stable can say, you know what, we have $250,000 of federal insurance money per depositor, just like the big banks do. So your money is safe with us, at least up to that amount. That certainly contributes to the number of banks we have in America.
DAVID HOLLERITH: Yeah. I know the peak number of banks in the US was like 14,000 around 1930. And so it's been consolidating since then. And I was sort of curious about what you think of the trend, what you make of it.
RICHARD SQUIRE: So the major statute repealing those federal laws, the main federal law, I should say, that prohibited branch banking was the McFadden Act in 1927. So it's not surprising to me that 1930, just a few years later, was kind of the peak number and we've seen a decline since. However, during the Great Depression, Congress helped to create, you might-- well, you're pretty young, actually, you might not remember the savings and loans. And there was a crisis that they ran into in the 1980s. But these were smaller banks, again, that were just supposed to take deposits and make local mortgage loans to homeowners and so on.
And so even after there was this move toward consolidation, with getting rid of the branch banking laws, there was still a subsidy for another type of smaller bank. Now the savings and loans failed as well in the 1980s. And so we are on this trajectory from 13,000 or 14,000 100 years ago, approximately, to 4,000 banks, approximately, now. And I think it's going to keep going down. Because too big to fail is a real phenomenon.
The two banks that just failed, famously, or the most visibly, Silicon Valley Bank and Signature Bank, were still fairly big banks by overall American standard. They'd be in the top 1% in terms of assets. And so there is an incentive for smaller banks to try to consolidate to the extent that they can, and the regulators will let them. The FTC sometimes tries to block these bank mergers. But there is pressure through too big to fail and the perception that these bigger banks are systemically risky, even just top 40 big, that will make it harder for the smaller banks to survive.
SEANA SMITH: Certainly is a very, very interesting story. And great putting that all into historical context for us. Professor Squire, great to have you. And of course, our thanks to Yahoo Finance reporter David Hollerith as well.