Why Signature Bank collapsed and Fed actions raise concerns of moral hazard : The Indicator from Planet Money The collapse of Silicon Valley Bank continues to ripple across banking and tech. Today, three indicators on the fallout, including what's next for some startup CEOs and why you might be hearing the term, moral hazard. And we talk about the other bank failure that's been overshadowed by SVB, New York-based Signature Bank.

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Banks gone wild: SVB, Signature and moral hazard

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And I'm Adrian Ma. It is Friday, which means it's time for indicators of the week. And joining us this time, we got producer Brittany Cronin.


Hello. Hi.

MA: What's up?

WOODS: So good to have you here for our three indicators, which are all about the big, big story of the last week - Silicon Valley Bank's collapse and the continuing fallout in banking.

MA: That's right. So after the break, we're going to look at what some startups are doing to try and pick up the pieces.

WOODS: My indicator is about questions being raised around moral hazard.

CRONIN: And my indicator is about Signature Bank and Barney.


DAVID JOYNER: (As Barney) We all make mistakes, but we can make most anything right again when we have some help from our good friends. (Singing) I'm so happy...

CRONIN: Not that Barney, a different Barney.

MA: (Laughter).

WOODS: It checks out if your friends are the government.

CRONIN: (Laughter).

MA: I was going to say that's pretty on-point for this week.


WOODS: Indicators of the week, banking worries edition - Adrian Ma, start us off.

MA: Indicator No. 1 is one, as in one new bank. So last Friday, the federal government created essentially a pop-up bank called the Deposit Insurance National Bank of Santa Clara, or initials DINB.

CRONIN: It's a very sexy name.

MA: Din, din-ba (ph).

CRONIN: Din-bee (ph).

MA: I like Din-bee (laughter). But DINB was this place where the government was going to take deposits that were stuck in Silicon Valley Bank, transfer them to a place where the customers could get to them on Monday. And on Monday, a lot of startups were, like, raring to get to these funds. And I wanted to know, like, once they could get to their money, what were they going to do next? Were they going to keep their funds in this new pop-up bank?

VANESSA PHAM: Nope (laughter). We are - we're definitely going to move our funds and diversify where they sit.

MA: So this is Vanessa Pham. She and her sister are co-founders of this company called Omsom, and they make starter kits to make Asian meals.

CRONIN: Yeah, they make sauces.

MA: Yeah.

CRONIN: You can, like, put it on tofu and vegetables and stuff.

MA: Not a paid endorsement. So the thing with Omsom was Silicon Valley Bank was their only bank, and they had their money stuck in there over the weekend. And when they first got the chance on Monday to get access to their funds, they were just like, we're out of here. They wired all their cash to a new bank. And Vanessa said to avoid getting caught up in a similar situation in the future, they're probably going to end up spreading their money amongst multiple bank accounts. And in the future, she says she's also going to be paying a lot closer attention to, like, the financial health and also just, like, what people are feeling about the banks.

PHAM: That's what a bank run is at the end of the day. And so it feels like a self-fulfilling prophecy, but we have to protect ourselves, be paying very close attention to sentiment around different banks.

CRONIN: I love paying more attention to feelings.

MA: (Laughter) So to contrast with Vanessa and her company, which got their money the heck out of there, I also talk with the head of this software startup. And he said they are actually not in a rush to move their cash. Their funds are in the DINB right now, and they can pay payroll and send checks to vendors and all that stuff. And he's not really worried about the money being safe because he was like, you know, the government stepped in and said they were going to protect the deposit. And how much more safe can you get than, like, a government guarantee?

WOODS: I mean, and that makes complete rational sense. And I've got a little bit more to say on that particular topic in my indicator later on.

MA: OK. Now I'm sufficiently hungry and feeling my feelings. Brittany, what you got?

CRONIN: My indicator is three or actually the third.

MA: One, two, third - OK.

CRONIN: The third biggest bank failure in U.S. history. I am not talking about Washington Mutual in 2008, and I am not talking about SVB. No, the bronze medal for failure goes to Signature Bank. It happened on Sunday. Everything, everywhere, all at once, New York regulators announced they'd taken over Signature.

WOODS: OK. Signature bank, it's been kind of overshadowed by the SVB stuff.

CRONIN: It has.

WOODS: But give us the backstory.

CRONIN: So it's a little bit of a he-said, she-said. Regulators say they have a crisis of confidence in the bank's leadership, which is particularly interesting because on the board of Signature was former Congressman Barney Frank.

WOODS: The Barney Frank.

CRONIN: The Barney Frank, aka the granddaddy of Dodd-Frank banking regulations that came out of the '08 financial crisis. Frank, for his part, he says, it's not me, it's you. He's suggesting Signature is being scapegoated for its involvement in crypto.

MA: Just when I thought this story couldn't get more zeitgeisty, of course crypto makes an appearance.

CRONIN: Oh, this story is so of the moment. Here is Frank on NPR's All Things Considered earlier this week.


BARNEY FRANK: I think this is the regulators, particularly, say, in New York, sending a message to banks - crypto is toxic, stay away from it.

CRONIN: So Signature Bank started accepting deposits from crypto companies a few years ago. By last fall, almost a quarter of its roughly $100 billion in deposits had ties to crypto. Then crypto prices dropped, crypto exchange FTX imploded, and by the end of the year, Signature said it would offload some of those deposits.

WOODS: Oh, my gosh, it all feels so connected. I'm so glad we can connect this to FTX because that was the other car crash that was hard to look away from last year.

CRONIN: Well, it gets worse for crypto.


CRONIN: So just last week another crypto-friendly bank, Silvergate, threw in the towel. They weren't exactly seized by the feds like Signature, but, you know, they closed up shop. And that further narrows the banking options out there for crypto firms.

WOODS: Got it.

MA: OK. So crypto is the - sort of explains it? Crypto is to blame here?

CRONIN: Depends who you ask - the regulators are like, nah, this is not about crypto. They say Signature just failed to provide reliable and consistent data this past weekend. That's when everyone was freaking out about SVB's collapse, pulling out all their money with abandon. And the big fear was that SVB's bank run could lead to this domino effect of all these banks collapsing that ultimately threatens the whole financial system.

WOODS: Right.

CRONIN: So far, regulators have only closed SVB and Signature, and, you know, a whole lot of feels out there, a lot of feelings happening.

WOODS: A lot of feelings happening - they're totally true. And among those debates, you'll hear a term, which is actually my indicator - moral hazard. And when you hear this term, you know we're in some kind of banking trouble. After the government action to protect the banks over the last week, some financial commentators are saying that this raises a moral hazard problem.

CRONIN: So I'm, like, seeing lots of yellow tape all over the Las Vegas strip right outside of the Taylor Swift Eras tour saying - warning, moral hazard.

WOODS: I wish that's what moral hazard was. But no, the term doesn't necessarily mean you're doing anything wrong morally per se. It just means that the incentives have changed. This is a classic piece of Econ 101 jargon. So here's the definition. It's when you have less of an incentive to protect against risks because you're shielded from the consequences. So maybe you're going to be spending all your money on beer and slot machines because your parents keep bailing you out.

MA: (Laughter) So...

CRONIN: That sounds awesome.

MA: ...There is a moral hazard in Las Vegas.

WOODS: Yeah, if you've got rich and generous parents, you do.


WOODS: So there may well be in that case. But, you know, in the case that we're seeing in the news - let's bring it back to the sober world of finance - this is about banks taking on more risk. After the government bailed out the deposit holders for the two big bank failures last week, people are saying that banks in general might feel free to be even more risky in the future and that depositors won't be as careful either. They're not going to bear the full consequences.

CRONIN: See, even the banks have feelings.

MA: (Laughter).

CRONIN: They're feeling (singing) freedom.

WOODS: I suppose they do, and not just here in the U.S. This week, the Swiss central bank said that it could lend billions of dollars to Credit Suisse to prop it up. Credit Suisse is this huge international bank that's made a string of bad bets, along with revelations of spying and a conviction last year for facilitating money laundering. And while there is a good case that Credit Suisse's possible failure would have big spillover consequences for the world economy, that action from the Swiss central bank to support Credit Suisse does make you wonder about moral hazard and banking.

MA: So for, like, policymakers who are trying to respond to these kind of, like, ups and downs, there's really no perfect choice here.

WOODS: That's right. It's super challenging. And there's, of course, this huge debate about whether regulators need to get tougher. And as we follow that debate, moral hazard will be a key part of it.

MA: That's it for indicators of the week. Thank you, Brittany Cronin, for joining us.

CRONIN: Remember, we all make mistakes, but we can make most anything right again if we have some help from our friends.

WOODS: Now that is a slogan for 2023.


WOODS: This episode was produced by senior producer Viet Le with engineering from Robert Rodriguez. It was fact-checked by Sierra Juarez. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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