Two U.S. banks have collapsed since Friday. What does this mean for the average American? NPR's Mary Louise Kelly speaks with Jacob Goldstein about the future of the banking system in the U.S.
MARY LOUISE KELLY, HOST:
We would like to think of banks as stable places where money is protected behind padlocks and steel bars, or these days, digital firewalls. But really, banks are inherently unstable. Their whole business model is take your money, loan it to other people and then make it back with interest. So what is happening now with the collapses of Silicon Valley Bank and Signature Bank is, on that level, somewhat unsurprising, at least to Jacob Goldstein. He is the author of "Money: The True Story Of A Made-Up Thing." He's also former host of NPR's Planet Money. Hey, Jacob.
JACOB GOLDSTEIN: Hi, Mary Louise.
KELLY: Hi. So I am hoping you will spend these next few minutes with us doing a primer, sort of a Banking 101. And I want to start with the situation unfolding right now. I keep hearing it described as an old-fashioned bank run. What is a bank run?
GOLDSTEIN: A bank run is when everybody who has money deposited at the bank goes to the bank all at once and asks for their money back.
KELLY: OK. And it's as simple as that? If everybody comes and withdraws at once, you have a problem.
GOLDSTEIN: Basically, yeah. And it doesn't even have to be everybody. If it's, like, mostly everybody, you have a problem, right? Because the fundamental thing about banks is they don't have your money, right? Like, we feel like they have our money. We can go look up our account online, and they say they have our money, but actually, they don't.
KELLY: Because they've loaned it out to somebody else, and they're hoping to make their own money off our money.
GOLDSTEIN: That's right. And, you know, that is not some, like, wild Silicon Valley fintech thing. That is, like, the most basic, boring, Banking 101 thing that banks do.
KELLY: And I suppose inherent in that is that a bank can be well managed, in great financial shape, not making high-risk loans, and it could still be susceptible to a bank run.
GOLDSTEIN: That's absolutely true. And in this instance, just to get ahead of the story a tiny bit, what really scares banking regulators scares people like Janet Yellen, secretary of the Treasury, is if you get to a moment when people are not worried about their particular bank; they're worried about the banking system as a whole, right? The one thing you don't want is for everybody to be scared because that sort of paradoxically can trigger a bank run and can be devastating to perfectly fine, perfectly healthy banks.
KELLY: Does the size of a bank matter as we discuss these things? - because we hear the term - you know, a bank too big to fail gets thrown around. SVB and Signature were not giant banks. They were midsize banks. Is that fair?
GOLDSTEIN: Yeah. They were midsize banks. And I think there're some really interesting not just economic, but kind of political dynamics at play here, because in the Dodd-Frank Act, the sort of new wave of bank regulation that followed the financial crisis of 2008, banks of the size of Silicon Valley Bank would have been subject to a stricter regulatory regime, right? The idea is if a bank is big enough that we've got to be worried about the broader economy, we're going to regulate it more intensely. But in, I believe it was, 2018, those rules were weakened essentially so that only the very biggest banks, only banks bigger than Silicon Valley Bank were covered. So that shift is quite notable at this moment - right? - because in a way, Congress was saying, OK, those banks aren't big enough to be systemically important. And then this weekend, regulators were like, actually, it is big enough to be systemically important. And that's why we're going to make depositors whole.
KELLY: So the banking system as a whole - how's it doing as of today, Tuesday?
GOLDSTEIN: Hopefully it won't change by the time this airs. I mean, it seems basically fine, right? Like, certainly throughout this whole thing over the past week, the very biggest banks have been fine. The banking system more generally seems OK. I mean, there are some set of concerns about the financial system more broadly, what other cracks are going to emerge as a result of that historical pattern.
KELLY: Yeah.
GOLDSTEIN: But for now, at least, it seems OK.
KELLY: Jacob Goldstein. He's an economics journalist. His podcast is called "What's Your Problem?" And his book is a history of money. Jacob Goldstein, thank you.
GOLDSTEIN: Thanks for having me.
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