Facing bank failures requires more courage from November candidates

Another six US banks failed last Friday, bringing the total number of failures this year to 125, and to 265 over the last 2 years. Yet the issue of bank failures remains a non-issue for both incumbent politicians and their challengers in this mid-term election cycle.

You can try hard to find a news article on a bank failure where a candidate sketches out some thoughts on what must be done to relieve the difficulties facing US banks, especially small community banks, but you’ll be trying for a long time.

In 1765, John Adams urged his fellow Americans not to shy away from discussions of public affairs, writing in a famous pamphlet: “let us dare to read, think, speak, and write.” It’s as if many candidates have decided to turn Adams’ advice on its head, and to not read, think, speak or write about bank failures.

That’s a shame, because there’s no better time than an election campaign to discuss the critical issue of what needs to be done to, wherever possible, preserve troubled community banks — rather than simply closing them down.

The candidates are not completely to blame for this silence. Many Americans seem to have forgotten how important community and regional banks have been to the economic development of the US as a whole. Consequently, voters are not pressuring candidates seeking election in November to speak out on the troubles facing these banks.

Perhaps there are some November candidates who would like to talk more about bank failures, but because they lack direct experience in finance, they fear sounding ignorant.

May I suggest such candidates rush to find a copy of the late former Federal Deposit Insurance Corporation (FDIC) Chairman Irvine Sprague’s book Bailout: An Insider's Account of Bank Failures and Rescues. Sprague’s clearly written book helps put the issue of bank failures into a larger context and is good background reading on the subject.

In addition to his time as FDIC Chairman (1979-1981), Sprague spent nine terms as a member of the FDIC’s board. The book is his recollection, as an insider, of what happens when a bank fails. By the time he left the FDIC, Sprague calculates that he was at the boardroom table for 374 individual bank failures or FDIC efforts to save banks from failing.

What did these 374 FDIC actions teach Sprague? He summarizes this at the end of the book. Sprague argues that, whatever laws politicians pass, or regulatory measures agencies like the FDIC enforce, you will never have a situation where you can eliminate 100 per cent of bank failures:

“The policies and practices of bank management that lead to failures can be curtailed to some extent but they are going to be repeated. Unburdened with the experience of the past, each generation of banks believes it knows best, and each new generation produces some who have to learn the hard way.”

“This record of repeat behavior points to the greed factor that remains the major – often the only – reason for a bank’s failure. Banks fail in the vast majority of cases because their managements seek growth at all cost, reach for profits without due regard to risk, give privileged treatment to insiders, or gamble on the future course of interest rates.”

Sprague’s book concedes that greed isn’t the operative cause in all bank failures, however. In a paragraph that has resonance today in 2010, he writes: “Severe economic conditions can and do create an environment that causes failures of banks that would have survived in better economic climates. Even so, in these depressed areas we see most banks survive. Management – either its excesses or its abilities –remains the determining factor of whether a bank lives or dies.”

It must have taken some courage for Sprague to write Bailout. He was under no obligation to leave a personal account of his time at the FDIC. Indeed, by publishing such a memoir, he took the risk of opening himself to criticism about whether he and his colleagues did enough to save troubled banks.

Thankfully, Sprague dared to “read, think, speak, and write” about his FDIC years. May Sprague’s example inspire a few of November’s political hopefuls to be similarly brave, and to “read, think, speak, and write” about what can be done to preserve more community banks from the turmoil of the Great Recession.

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