Top 10 Awful Truths The Banking System Doesnt Want You to Know

During the Great Depression, one of Franklin D. Roosevelt’s first actions as president was to get Congress to create the FDIC. The Federal Deposit Insurance Corporation insures bank deposits. That insurance provides consumers with confidence that their money will be protected if a bank goes under. As we learned quickly during the SVB Collapse, FDIC insurance isn’t perfect. As of writing, the FDIC is only required to cover up to $250,000. The government chose to backstop full deposit amounts at SVB to avoid contagion, but there's no guarantee that they’ll do so in the future. Other investments like bonds and stocks, T-bills, safe deposit boxes, and annuities are not covered by FDIC insurance at all.

A large, unregulated series of structures and institutions underwrites the global financial system. Known as the ‘shadow banking system’, it’s often directly connected to turmoil within the banks. It includes financial middlemen like hedge funds, private equity firms, large investment banks, and mortgage lenders, as well as unregulated activities by otherwise regulated organizations. An example of the latter are credit default swaps, which were responsible for the 2008 financial crisis. These systems and activities generate an unbelievable amount of wealth with little-to-no global oversight. According to the Financial Stability Board, shadow banking accounted for almost half of all financial assets in 2021. Without regulation and oversight, it’s not a matter of if shadow banking will cause another global crisis, but when.

In this brave new world of modern technology, personal information is at risk 24/7. With banks the threat is doubled; they can access much of the same personal information as social media, but also house all your financial data. The Experian and Capital One hacks may end up being the tip of the iceberg. In 2020, the Financial Stability Board warned that “a major cyber incident, if not properly contained, could seriously disrupt financial systems, including critical financial infrastructure.” Virtually all bank information and money is digital now. At the click of a button, anyone’s money could just vanish. The entire global financial system could grind to a halt. According to one cybersecurity firm, financial organizations around the world faced an average of 700 cyber attacks per week in 2022.

A 2009 UN report estimated that money laundering accounted for 2.7% of global GDP, or $1.6 trillion. It’s only gotten worse in the years since. Investment banks in countries with low transparency are hubs for criminals to wash their money. The process of laundering money involves three steps: placement, layering, and integration. Placement puts dirty money into the global financial system. With layering, criminals conceal their tainted income streams using accounting tricks and financial transactions. Finally, they reintegrate their money after it’s been ‘cleaned.’ Banks will often do the minimum amount of work possible to suss out laundering among their client base. A prime example was HSBC in 2012. They were found to have laundered $881 million for Mexican drug cartels.

In 2022 and 2023, President Joe Biden called on Congress to go after junk fees with legislation. He also directed The Consumer Financial Protection Bureau to study them and crack down. Banks are some of the worst offenders out there, having received virtually no scrutiny until recently. They love to nickel and dime their customers in every way they can to generate profits. In 2020, US banks made over $12 billion in overdraft fees alone, down from $17 billion in 2018. For banks, it's basically free money. They’ve snuck hidden fees into every nook and cranny of their products they could find. Unfortunately, these 'minimum deposit' fees, withdrawal fees, and debit card fees tend to target and hurt working class customers the most.

The influence of lobbyists on American politics has been a problem for decades. It’s become a cottage industry, and since the Supreme Court’s Citizens United ruling of 2010, business has been booming. Between the 2016 and 2022 elections, the banking industry contributed almost $200 million to American political campaigns. Though they do contribute to both parties, the banking industry spent money nearly two-to-one on the GOP in 2018. Perhaps it’s a coincidence, then, that 2018 was also the year that a Republican-controlled Congress and President deregulated their industry. According to one IMF study, there is a direct connection between industry lobbying and the global weakening of regulations.

After the 2008 global financial crisis, President Barack Obama proposed sweeping reforms, and Congress passed the Dodd-Frank Act, designed to reduce the likelihood of a future crisis. In 2018, a Republican congress passed a bill with bipartisan support to weaken those regulations. Smaller banks were taken off the list of companies subject to stress tests, higher capital requirements and ‘enhanced prudential standards’. Essentially, mid-tier banks like SVB were allowed to be less prepared for emergencies. As the nonpartisan Congressional Budget Office declared at the time, the bill “increased the likelihood that a large financial firm with assets of between $100 billion and $250 billion would fail." Though not completely responsible for SVB, banking deregulation makes crises more likely to happen, and worse when they do.

People of color have never had equal access to banks or the capital necessary to gain economic mobility. In every way that banking touches American life, it’s deficient in minority communities. According to the Brookings Institution, there’s a stark contrast at the local level when it comes to access to credit. For example, there are fewer bank branches in Black and Hispanic neighborhoods. Loan interest rates are on average worse for Black and Hispanic customers. Most importantly, mortgages are also harder to obtain. Since the 1950s, homeownership was seen as the pathway to the middle and upper classes. Home values tend to increase over time, providing wealth for future generations. Homeownership and loan access are some of the greatest contributors to the racial wealth gap.

The collapse of SVB is a prime example of the role consumer confidence plays in banking. In many ways, banks are an illusion. Their job is to take deposits, pool the money, and lend the money out to make a profit. But banks don’t need cash-on-hand to cover every deposit. That’s why a drop in confidence can lead to disaster. Had confidence not been tested by a bank run sparked by a small band of ultra-wealthy investors like Peter Thiel, a collapse may never have happened. But SVB didn't have enough cash on hand to cover withdrawals, so they failed. Low confidence and bank runs can spread like a virus, causing contagion and disaster throughout the sector.

The purpose of a bank is to take and hold the money of its customers and generate profit. Typically, that takes the form of fees, loans, or mortgages. But banks also like to invest to make larger profits. As with any gamble, a bad bet can lead to ruin. In 2007 and 2008, the bad bet was subprime mortgage backed securities that went bust. For SVB, it was U.S. treasury bonds that tanked when interest rates went up. In both instances, banks took our money, gambled with it, and lost. When a bank collapses, the options aren't great. Since 2008, hundreds of banks have failed, although the rate has calmed down since the aftermath of the Global Financial Crisis. Time will tell if that remains true in coming years.