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April 21, 2023

On March 3, 2023, the Federal Deposit Insurance Corporation (FDIC) chairman, Martin Gruenberg, concluded his talk to the Institute of International Bankers with this statement: “My purpose today has been to emphasize that, while banks continue to report strong performance and problem banks and failures are few, risks remain on the horizon.”

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Mr. Gruenberg wasn’t joking.

Seven days after his speech  Silicon Valley Bank (SVB) was closed by regulators.  A few days later, Signature Bank and Credit Suisse failed, and First Republic Bank required a massive infusion of cash in order to avert collapse.

On March 12, a mere nine days after Mr. Gruenberg’s speech, the U.S. Treasury, the Federal Reserve Bank, and the FDIC issued this assurance as part of a joint press release:

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The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry. Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.

This statement is, ostensibly, an attempt to bolster confidence in the banking system.

Yet why do banking industry regulators need to reassure depositors that “the U.S. banking system remains resilient and on a solid foundation” if the U.S. banking system is actually “resilient and on a solid foundation”?  Does the banking system merely appear to be in a state of disarray?  Or are crashing banks and billion-dollar bailouts just the way things go?

It’s interesting to note the joint press release doesn’t specify which “financial crisis” spurred  “reforms that … ensured better safeguards for the banking industry.”  Did they mean the recent SVB/ Signature bank bailouts?  Sam Bankman-Fried’s FTX $32-billion crypto exchange implosion?  The 2007–2009 “Global Financial Crisis”?  Bernie Madoff’s $80-billion Ponzi scheme?  Or any of the long list of financial crises that have occurred over the past hundred years under the not so keen oversight of the federal regulatory apparatus?

Since the Dodd-Frank Wall Street Reform and Consumer Protection Act is the last major legislation passed in response to a “financial crisis,” the press release probably refers to the regulatory changes instituted by that particular piece of legislation.  However, touting the success of Dodd-Frank days after the collapse of three major American banks is disingenuous at best.  After all, SVB, Signature Bank, and First Republic had rested on “the resilient and solid foundation” of Dodd-Frank right until the moment they ceased to exist.

And it should be noted that one of the sponsors of the Dodd-Frank Bill, ex-Massachusetts congressman Barney Frank, sat on the board of  Signature Bank.  During the three years before Signature crashed, under the not so watchful eye of Mr. Frank, the bank’s executives divested themselves of over $300 million’s worth of stock.  Similarly, executives at SVB, including CEO and board member of the San Francisco Fed Greg Becker, sold $85 million’s worth of shares in the two years leading up to the bank’s collapse.  Executives at First Republic,  not as quick off the mark, sold off a paltry $11 million in stock in the months before the bank failed.