INDIANAPOLIS (WISH) — The closure of Silicon Valley Bank and Signature Bank over the weekend could have wide-reaching impacts on Hoosiers, according to an Indiana University Kelley School of Business professor.
Kristoph Kleiner tells I-Team 8 that the failed banks were flush with cash just a few years ago. They invested that money in short-term bonds, and when inflation hit and interest rates rose, those investments turned bad, causing this problem.
“When there was a sudden run on those banks and people wanted their cash out, these banks had to sell these treasuries at a loss. That prompted more runs, and eventually they weren’t able to meet the demands of those depositors,” Kleiner said.
He says the roots of this trace back to the Economic Growth, Regulatory Relief, and Consumer Protection Act, which passed both the House and Senate with bipartisan support before being signed by President Donald Trump in 2018. This act reduced some regulations that were put in place after the financial crises in 2008.
“What happened in 2018-2019 is that we saw a roll back of certain previsions and specifically how often these banks are checked on. If we would’ve had those previsions, it’s likely we would have caught these issues earlier on and we might have prevented these bank runs,” Kleiner said.
Kleiner tells I-Team 8 it’s unclear if banks in Indiana are involved in similar types of investments as the failed banks, but it is likely some businesses in Indiana had money in these failed banks, though that number is not publicly available.
Kleiner said, “A number of large start-ups are in Indianapolis and other parts of Indiana, so they might actually be customers of these banks. I don’t think it’s a direct concern for them because the U.S. government has already said that all depositors will get their money back, but at least temporarily those might be a concern for those companies to match their payroll, let’s say this coming week, until that money comes in.”
The problem isn’t just for businesses, Kleiner says, telling I-Team 8 that banks in Indiana could also be at risk.
I-Team 8 asked Kleiner if a small- or medium-sized bank in Indiana could potentially close its doors because of what’s going on.
Kleiner said, “It’s certainly possible. I don’t want to speculate, because this is exactly the concerns with bank runs. If you kind of focus on one bank and everybody gets concerned, that banks get affected even if they did nothing wrong and are completely solvent.”
Despite this possibility, Kleiner says that Congress likely could act to strengthen banking regulations because of these recent failures. U.S. Rep. Andre Carson, a Democrat from Indianapolis, voted for the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. Carson was in Indianapolis Monday at a youth job fair, and though he declined an on-camera interview, he sent a statement.
“I joined a large bipartisan majority to pass changes in 2018 to provide assistance to smaller financial institutions like credit unions and community banks that many of my constituents urged us to support. It also adjusted the thresholds for periodic ‘stress tests’ to assess the financial health of some larger banks. I believe it’s time to review and update those changes to bring the requirements closer in line to our original Dodd-Frank standards, which I was proud to vote to establish. This will help strengthen our financial system to keep it resilient and reliable as economic tides ebb and flow.“
U.S. Rep. Andre Carson, a Democrat from Indianapolis
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