Kerby Anderson

“Barney Frank was right about Signature Bank.” The editors of the Wall Street Journal” never thought they would write that headline. But let’s give credit where credit is due. Barney Frank alleged a few weeks ago that regulators seized the bank (where he served on the board) “to send a message to get people away from crypto.” The latest action by the Federal Deposit Insurance Corporation confirms his suspicions.

The banks that collapsed last month illustrate that we are experiencing significant paradigm shifts. This action by the FDIC to assume all the cash deposits of the bank, except those of crypto companies is just one change.

Another change is the decision to bail out all the deposits over $250,000 at Silicon Valley Bank. This was justified under the “systemic risk” exception in the Dodd-Frank Act. This decision signals the end of “market discipline for banks” and increases the “moral hazard” that occurs when bank officers engage in risky investments but fail to take appropriate action knowing they will be bailed out by the government.

Another paradigm shift was the speed of a bank run. In the old days, fears of a bank failure spread by word of mouth (think of the movie, “It’s A Wonderful Life). Twitter and social media spread rumors at lightning speed. Also, depositors no longer needed to stand in line to take money out of their bank. The depositors have access to online banking. They were able to drain $42 billion from the bank in one day.

Barney Frank may have been right about the seizure of Signature Bank, but the legislation that bears his name seems wrong. The premise of Dodd-Frank was the assumption that regulators would accurately monitor all bank risks. They obviously failed to monitor all the risks.