Ask Archer: is my money safe in the bank?

A reader asks: Is my money safe in the bank?

Archer replies: The best thing about the latest banking crisis has been the opportunity revisit Frank Capra’s 1946 movie, It’s a Wonderful Life. As we all know, the film is, at its heart, a story about the fractional reserve banking system. Yes, there are other things going on – Jimmy Stewart (George Bailey) saves his brother from drowning, threatens to jump off a bridge. There’s an angel.

But this is all just set up. The real action starts when Uncle Billy misplaces $8,000 of money belonging to the Bailey Building & Loan. Sort of like when Sam Bankman-Fried couldn’t locate $32 billion or so in customer dollars. So where did it go? They didn’t have the Internet or remote deposit back then so Uncle Billy just wrapped the money in a newspaper for safekeeping. It then ends up in the hands of the film’s villain, the inexecrable Mr. Potter, who sits on the board of Stewart’s Building & Loan. A man straight out of the Noam Chomsky school of exploitive plutocrats, Potter decides to keep the money, intending to use the shortfall to ruin Stewart.

This isn’t the first time the Building & Loan has been in trouble. Early on in the movie there’s a run as rumors of a bank failure send the townspeople racing to get their money out, all barking mad. Stewart then does what any sensible financier would do: he delivers a lecture on fractional banking.

“You’re thinking of this place all wrong,” he says to the mob that has invaded his office, “as if I had the money in the back in a safe. Your money’s not here … it’s in Joe’s house (he indicates Joe), and in the Kennedy’s house and a hundred others. You’re lending them the money to build. What are you going to do, foreclose on them?”

This lesson in economics is a bit of a head scratcher for the crowd, but It’s Jimmy Stewart so they’re inclined to take his word for it. When his new wife, Mary (played by Donna Reed) ponies up $2,000 of their own money to distribute to the gathered depositors they relent and the crisis is resolved.

But the matter of the missing $8k is different. “Do you realize what this means?” a desperate Stewarts screams at Uncle Billy. “It means bankruptcy, and scandal and prison!” And indeed it may.

But in the end, it doesn’t. The townspeople rally and drop a sack of cash on the bank, collectively stepping into the role made famous in modern times by former Fed Chair “Helicopter Ben” Bernanke. George’s war hero brother arrives with a promise of additional capital. All ends well.

No one in Bedford Falls broaches the subject amidst the celebration, but in our time such a bailout would inevitably lead to a discussion of “moral risk” – the idea that by rescuing failed enterprises we are encouraging future bad behavior. That this happens is undeniably true. However, it’s worth pointing out that those who are most loudly concerned about such risks tend not to be the same people whose life savings are about to be wiped out.

It’s true, too, that unlike George Bailey former Silicon Valley Bank CEO Greg Becker wasn’t standing at the door of the bank’s headquarters writing personal checks to depositors. There were probably many reasons for this but the most salient one may have been that the customers didn’t have to storm the bank to get their money back. All they had to do was log into their accounts and click.

Getting back to the matter at hand, there were about $8 trillion in uninsured deposits at US banks at the end of 2022, according to The Wall Street Journal. For most, this is a matter of mostly theoretical concern; about 99% of deposit accounts (the number of accounts, not the dollar value) were under the $250,000 guaranteed by the government, according to the FDIC. Further, as Bloomberg’s Matt Levine wrote last week, “bank stocks look worse than banks do.”

But that can change, and fast. Like most of life the banking system requires a little faith to hold together. That’s true for building & loans, it’s true for the people of Bedford Falls, and it’s true for the social contract generally. It can be a fine line. We don’t want to get on the wrong side of it.

Woof.