Early in March the sixteenth largest bank in the United States with more than $200 billion in assets experienced a sudden collapse which wiped out large depositors, eliminated investor equity, and created a financial panic which affected financial institutions all over the world. The collapse of the Silicon Valley Bank in California occurred within hours after depositors discovered the bank no longer had enough liquidity to satisfy the demand for cash. There was no warning of impending disaster largely because the last few years during the Trump Administration government regulators were blocked by anti-regulatory politicians in the federal government from doing their job closely examining the bank’s marketable assets, current liabilities and significant exposure to financial risks. The financial panic and total collapse of SVB’s market value and capital resources was the direct result of corporate greed and negligence, putting short-term profits ahead of long-term stability and public service.

Like many other middle-size regional banks, SVB grew by assets and net worth many times over, especially since the last government bailout of the financial services industry in 2008. Although strict regulations were provided for with the bailout, after a few years lobbyists and influence peddlers on behalf of regional banks, with active support from President Trump, persuaded members of the Republican-controlled Congress to pass legislation in 2018 that softened, even eliminated, many of the regulations that would have prevented regional banks from excessive exposure to risk and significant threats to their liquidity. After the bank bailout in 2008 SVB had about $40 billion in assets. Just before its collapse the bank’s assets had grown five times to more than $200 billion in assets.

The SVB’s vulnerability became exposed as interest rates increased after the economic impact of the covid pandemic subsided. During that time SVB made an excessive number of loans to businesses in the high-tech industry in the “Silicon Valley” region of California. In the absence of government oversight, the bank did not maintain a sufficient level of cash reserves to protect its depositors from market fluctuations. Corporate greed and high demand for loans from corporate borrowers resulted in SVB maintaining a high risk loan portfolio without adequately compensating for risks and cash shortages. When the value of its loan portfolio declined dramatically earlier in the year as a result of increasing interest rates, depositors who kept large amounts of cash began to withdraw from their accounts, and the bank was unable to keep up with the demand for cash. When the demand for cash became so great, other depositors panicked and began what became a “run” on whatever liquidity the bank had left. When there was no cash left to pay depositors, the bank had to close as it was taken over by state and federal regulators. There weren’t sufficient assets to pay large depositors for the full amount of their accounts, so regulators would have to find another bank with sufficient assets to take over SVB and pay depositors in full. Otherwise, regulators would have to dispose of assets at much less than book value and pay off depositors as best they can.

The sudden collapse of the Silicon Valley Bank created a huge strain on the financial markets as a whole, and had international complications. The United States central bank had to postpone implementing higher interest rates, and began to provide more liquidity for banks that were under-capitalized. The damage from SVB had to be contained and managed so it wouldn’t spread to other large banks and create another collapse of the financial system similar to what happened in 2008.

Of course pro-corporate and reactionary politicians were quick to blame the bank for lending too much money for too many disadvantaged borrowers, and blamed the Community Reinvestment Act for compelling SVB to provide resources to members of the community in its service area. This was far from the truth. In fact, only a small percentage of the bank’s loans were invested in small,businesses and low-income borrowers. Ironically, most of the bank’s resources and its best customers were concentrated in the high-tech industry, and were disproportionately very wealthy keeping very large cash deposits with the bank. That is why it collapsed so quickly as the bank’s depositors panicked at the first sign of a liquidity squeeze, forcing a “run” on the bank’s cash assets and eventually forcing it to close.

SVB’s best customers were not small depositors and borrowers, but rather other big corporations and market capitalists, especially in the high-tech industry. Among the most influential customers were speculative cryptocurrency firms that kept billions of dollars in cash deposits to protect themselves from extreme fluctuations in their liquidity. When the bank started to falter, they were the first ones to withdraw their cash in large amounts and instigated the “run” on the bank by other large depositors. Contrary to political propaganda, the bank’s collapse had nothing to do with small depositors and borrowers. It was all about the cowboy capitalism that typifies the Silicon Valley economy.

Several days after the collapse of Silicon Valley Bank, another mid-size regional bank in San Francisco saw its market value of assets crumble as well. Like SVB, the First Republic Bank catered mostly to wealthy, high-income corporate and personal business customers who also had high exposure and vulnerability to market fluctuations. Among the bank’s best customers was Facebook owner Mark Zuckerberg, as well as many other megabillionaires who kept billions of dollars worth of uninsured deposits that made First Republic dangerously vulnerable to a potential “run”on its cash assets. In order to prevent a financial panic and avert a crisis like the one that shutdown SVB, a group of bank executives representing the largest commercial banks in the country provided a bailout worth billions of dollars which would establish sufficient liquidity to prevent First Republic from shutting down completely. As with SVB, there was not one shred of evidence to implicate loans made to low-income, disadvantaged individuals and small businesses. To the contrary, First Republic’s assets were concentrated in favor of the wealthiest corporations and individuals who kept unusually large, billions of dollars worth of deposits which would eventually disappear if First Republic had to shut down. At the same time Signature Bank, a New York Bank that speculated with financing rent-controlled apartment buildings in New York City, saw its market value tumble as the valuation of its loan portfolio was decreased significantly. Although the portfolio was still profitable, it wasn’t profitable enough for some investors who quickly withdrew their uninsured deposits and forced the bank into liquidation. 

The concentration of wealth and financial power among a shrinking number of capitalist manipulators is one of the greatest impediments to implementing social justice and economic fairness. Every few years financial speculators and predatory capitalists squeeze so much out of the pockets of middle class and low-income consumers that the entire structure of consumer debt and corporate finance collapses like a house of cards. When that happens so-called conservative, laissez-faire advocates of economic deregulation and limited government suddenly reverse themselves and demand that limited government should be limited to protecting their interests, which means a government “bailout” by printing more money and giving it to the same laissez-faire capitalists who oppose any financial mechanism that provides support for poor, disadvantaged people and communities.

The sudden collapse of Silicon Valley Bank is just one more reason why community-owned, public banks are necessary to achieve stability in financial markets and avoid the calamitous breakdown of the banking system that invariably occurs every few years. It is no coincidence that these financial collapses occured after significant deregulation of the banking industry. In 1981-82 the Reagan Administration succeeded in repealing legislation that had successfully regulated commercial banks and mutual savings associations for decades. A few years later financial markets collapsed while corporate banks were failing all over the country. During the Bush Administration after 2001 regulations were reduced or eliminated entirely which led to what became known as “irrational exuberance” in the financial services industry, characterized by unrestricted speculation in financial markets as well as typified by “cowboy capitalism” which exploited mostly poor and disadvantaged victims. Again, when markets collapsed in 2008, new regulations were put in place, but a few years later they were repealed as well during the Trump Administration, leading directly to the collapse of Silicon Valley Bank and putting further strain on an already vulnerable banking system.

In contrast to the various and frequent failures of corporate banks,throughout the 20th and 21st centuries, one bank stands out as the most consistently profitable and secure bank in America. The Bank of North Dakota is entirely state-owned and managed, fully accountable to the representatives of the people of North Dakota. It was established more than a century ago in the aftermath of agricultural failures and depression in the farming economy. Its purpose was to refinance delinquent loans for families and farmers that otherwise would suffer foreclosure, and provide financing for public infrastructure and improvements.Today the bank continues to fulfill its mission without hindrance or interference from corporate banks and vulture capitalists.The BND provides credit and other financial resources to families, farmers and small businesses that otherwise would be denied credit from traditional, investor-owned corporate banks.

After numerous financial collapses and government bailouts for the corporate sector in the past few decades, there is growing interest in several states to establish their own state or community-owned banks largely based on the successful model of the Bank of North Dakota.

After his election as Governor of New Jersey in 2018, Governor Phil Murphy proposed a state bank for New Jersey, which would hold state deposits and use those accounts as leverage to provide financing for economic and industrial development throughout the state, assisting counties, cities, towns and local communities for improvements and infrastructure which would benefit the state’s residents. There are bills pending in the New Jersey legislature to establish and implement a state bank in accordance with the governor’s proposals. However, the covid epidemic and other political issues are forcing a delay. In the meantime, the state is holding public hearings on the subject, various concerned groups and individuals have testified both for and against a state bank.

In California Governor Gavin Newsom signed the Public Banking Act in 2019, which enables cities and counties to establish public banks using their financial resources to provide funding for local infrastructure, internal improvements, and support for community groups and public agencies. Since that time several cities and counties, including Los Angeles and San Francisco, have begun the process of setting up their own public banks in accordance with the procedures of implementation provided for in the law. As in New Jersey, the economic impact of the covid pandemic had slowed progress in establishing public banks, but public banking advocates in California’s major cities have been successful in getting bills passed which would eventually lead to making public banks a reality in many communities.

On the national level there has been significant interest in public banking among advocates for economic development to benefit public infrastructure and improvements, as well as support disadvantaged communities with financing to help local residents that they would not get from traditional financial institutions. In 2021 supporters of public banking introduced the National Infrastructure Bank Act to establish a federal bank which would partner with local and regional banks to provide funding for infrastructure and internal improvements with special emphasis to benefit low-income and disadvantaged communities that could not get financing from traditional banks. The bank would sell preferred shares to investors in exchange for US Treasury bonds which would provide a stable and secure source of funding for appropriate projects. The bank would be operated as an independent federal agency, similar to the US Postal Service, and supervised by a board of directors whose members would be nominated by the President and approved by Congress. In addition to federal management, there would be regional boards appointed by state governors and responsible to distribute financial aid and target those projects which would most benefit their respective communities. The regional boards would be set up to receive input from relevant groups and organizations that have a legitimate need for government financial support.

Perhaps the best hope for the near future of public banking is the City Council in Philadelphia, Pennsylvania which recently voted almost unanimously to establish the Philadelphia Public Financial Authority. Although not a full service commercial bank, the Financial Authority would be empowered by the city to act as a source of credit to local businesses and public service organizations that otherwise would not be able to obtain financing from corporate banks. Its organizational mission would be to target disadvantaged individuals, groups and small businesses with credit that would benefit their community and all the residents of the city. The PPFA would obtain its funding by leveraging the city’s financial resources to guarantee loans for qualified and worthy borrowers. Unfortunately, the city’s current Mayor has refused to appoint a board of trustees and executive committee to govern the PPFA, nor has the Mayor agreed to provide funding for the PPFA in the city’s current budget. However, there is an election for Mayor later this year, the current Mayor is prohibited from serving another term, and all of the leading candidates for Mayor have endorsed the PPFA and pledged to implement the public financing law if they are elected. The hope is that assuming all of the candidate supporters of public banking will implement establishment of the PPFA and provide appropriate funding, whoever is elected mayor and working with the city council should be able to quickly direct the city’s financial resources and provide financing to those groups, businesses and organizations who are most in need of public support.

If the Philadelphia Public Financial Authority does become a reality in the near future, it may serve as a model for public banking in other states and localities. Hopefully, public financial institutions like the PPFA will eventually accept deposits from individual consumers and businesses, as well as provide on demand accounts for checking and savings customers. Also there would be the opportunity for consumer and business groups to have for input into the management of the bank’s financial resources for the benefit of the whole community. This would be one small step, though very significant, in giving consumers and businesses much greater participation and control over how financial capital and other resources are used for the public benefit.