Dear Financial Community:

The failure of Silicon Valley Bank is enormously troubling. Call it an isolated circumstance all you want, but it has further stressed our nation’s dialogue. An echo of other bank failures has followed SVB down the drain. Long lines of anxious customers waiting outside banks are never something we want to see. This was unnecessary. This was bad form.

As dependability in our institutions continues to fray, I worry increasingly about where we’re headed. As divided as we are in this nation, can we withstand a true crisis of faith in our banking system? What understandable assurances are in evidence that wider contagion is not possible, that limits can be maintained on the ramifications of remarkably poor judgment?

Where does resilience meet its match and cause us to lose faith in the basics of our grand experiment in economic expansion?

Our economy works on a number of elusive factors in concert with tangible reporting. One of those is faith. If we lose faith in our banking system, the notion of ongoing growth and innovation at scale seems to go out the window. The economic miracle we have created together freezes solid and then melts into the ordinary.

Ample credit fuels dreams. Intelligently borrowed capital brings to market hopeful new companies and bolsters the expansion of existing businesses. Financial institutions, mostly banks, have to lend money for ideas to become enterprises.

Lending money as its own business only works if there is leverage in lending. We understand the rules of engagement: a bank keeps some cash on reserve and lends more than it has at any given time. This works fine as long as there are no unaddressable runs on banks.

Should redemptions exceed liquidity, banks are forced to liquidate assets at any price to return cash to depositors. Trust in the banking system and the FDIC is required of depositors to prevent runs from melting down banks. Trust is a reflection of faith. Lose all faith, lose all trust, we all lose.

Here’s ground zero: If we lose faith that banks can get our money for us whenever we ask for it, deposits cease. If there are no deposits, there can be no lending. That’s the endgame you are teasing when you fail to do your job and cautiously manage risk. Kill deposits, kill lending — that’s a death spiral in the making.

Faith is increasingly becoming a conflicted proposition. Reckless financial engineers test us every decade. The savings and loan crisis. Long-Term Capital Management. Sub-prime mortgages. Washington Mutual. Collateralized debt obligations. Lehman Brothers. One day the combined impact of these attacks on faith may succeed in fully undermining the little faith we have left.

Then the thinning ice cracks for good.

Don’t tell me this time it’s about rising interest rates that weakened your balance sheet. You’re smarter than that. You know history. You knew interest rates had to rise. Nearly free money is never forever. You’ve been making loans as long as you’ve existed. You understand liquidity. You understand it so well that you spend millions lobbying against the very regulations you need to stay in business.

There are no excuses. You take bonuses for being clever. When you’re too clever, the damage has the potential to become systemic. When faith in the system evaporates, apologies are meaningless.

A brand is a promise. When a bank’s brand fails that promise, the entire concept of for-profit banking is soiled. We are only human. Serial violations of trust reveal fragile faults in what we’re repeatedly told is a robust system. We can only experience so many failures before trust is gone.

If we come to believe that U.S. Treasuries are the only safe place to park our money, what happens to commercial lending? If commercial lending retreats, how do the entrepreneurial efforts of the next hundred years replicate the last hundred years?

Do we really want to depend on government to keep righting the wrongs of irresponsible, conniving executives? Government’s role is to referee where self-regulation has proven farcical. Regulate, yes. Adjudicate, yes. Underwrite exponential losses, unsustainable.

If government must guarantee every deposit regardless of the amount in order to maintain faith in those deposits, how can bank executives ever be trusted to take risk seriously?

There’s a lot at stake, more than many of us may yet realize. We’re shell-shocked, but we’re supposed to maintain faith. Each day it’s harder. Each day we put our own historical investment paradigm at risk.

In simplest terms: Please stop putting our nation’s future at risk and punting your unnecessary failures to manufacture compensation you haven’t earned and don’t deserve.

Seek to restore our faith. You need deposits. We need loans. Keep our money safe to put it to work properly. We’ll pay our installments. That’s the contract. It’s a virtuous circle. We all have to abide by the rules, not wait to get caught if enough oversight is available.

Please make the rules work to all our advantage and believe in something more than your own benefit. Prosperity hangs in the balance. You’re toying with breaking everything. Let’s look to another hundred years of wise lending and liquidity to continue investing in positive outcomes we can’t even yet imagine.

Yours in faith,

A dissatisfied lifelong banking customer

_______________

Photo: Pixabay