What do recent bank failures mean for Connecticut?
The recent failures of Silicon Valley Bank and Signature Bank, which catered mostly to the tech industry, may have you worried about your money. They were the second- and third-biggest bank failures in U.S. history.
It all started last week when too many depositors tried to withdraw their money from Silicon Valley Bank in Santa Clara, California. That's known as a bank run.
The bank had to sell treasury bonds and other securities at a steep loss and more people kept trying to withdraw money as word of the situation spread, causing the bank to fail. Regulators took control of New York-based Signature Bank soon after, saying it was necessary to protect depositors after too many people withdrew money.
UConn School of Business Assistant Professor Ryan Coles recently joined "All Things Considered" to talk about the local impact of the closures.
The following is an edited transcript of the conversation.
John Henry Smith: Why should people in Connecticut care about two bank failures that happened outside of Connecticut?
Ryan Coles: More and more, we've got VC (Venture Capital) funded startups in Connecticut, and given that Silicon Valley Bank does banking for 50% or more of these startups, it's likely that we've got some of our own startups banking there.
It was a bit worrisome this late past week because that is a lot of founders and a lot of people working at these startups that wondered whether or not their jobs were on the line.
Smith: Your answer really kept it locked into the industry-specific type of thoughts like, 'You know, hey, this is about venture capital and so on so forth.' But you know, I heard a fair amount over the weekend of 'This is a bank' and if people start losing confidence in the venture capital realm, at what point does that snowball into something bigger?
Coles: I don't see this as a 2008 level financial system breakdown event.
Smith: And thankfully, not 1933, right?
Coles: And not 1933, either, right. Silicon Valley Bank was tailoring to high-growth startups in their services and in their willingness to take on a lot more risk than traditional banks would who work with other types of businesses — established small, medium-sized businesses or larger corporations.
Now, in terms of trust from larger corporations or trust from those of us, in terms of our personal banking, I think this is where we see maybe sometimes federal government action can be beneficial to step in and re-ensure trust on a system level.
Smith: Which President Biden did.
Coles: Exactly. It seems, in my view, that they've done an effective job of that so far.
Smith: I want to invoke the "O" word: oversight. Because is it not true that what happened at least to SVB and probably to Signature as well is a failure of oversight? And of course, we know that the Dodd-Frank Act has been repealed, which put guard rails and oversight, you know, over the industry that the the entire industry is without now. So what is our level of oversight on banks that don't serve the startup tech industry? And because Dodd-Frank is gone, why shouldn't we be concerned about this happening at other banks?
Coles: One of the reflections that we should all have in this case is we need to return to thinking more critically about different markets and how we make sure we have a level of oversight and governance to ensure that markets are free because those have to be actively constructed and maintained. They don't occur naturally.
Smith: When should regular folks start to worry and what should they do when they have legitimate reason to worry?
Coles: I think when you see fundamentals of those banks strong and you see the federal government taking agile and appropriate action, then I don't think there's a cause of worry there. I think it would be different if there wasn't agile action and you saw a continued contagion event. That's why I really don't deep down see need for widespread panic. And I think my message would be to the people of Connecticut that it's perfectly fine to want to call up your bank and say, 'Help me understand why you think that your bank— the bank I'm banking at — is in a good position.' And that's what I would do — I think — before taking action. The problem is people panic and just take action and withdraw the money.
The Associated Press contributed to this report.