You should be mad about the chaotic and swift collapse of Silicon Valley Bank.
If you are a customer of Silicon Valley Bank, you should be furious with its executives for their incompetent risk management and poor communications strategy. If you work in start-ups or the technology sector, you should be angry at the venture capitalists who spurred a bank run at SVB only to turn around and beg for Uncle Sam’s help with impudence.
Perhaps most of all, you should be furious with the American government—not for its creation and execution of a bailout to protect the broader financial sector, but because its help was needed in the first place. You should be mad at Congress for loosening regulations on medium-size banks like SVB five years ago. And you should be mad at the federal and state regulators who, as supervisors of the system, allowed this mess to happen.
[Annie Lowrey: Silicon Valley Bank’s failure is now everyone’s problem]
With the acute phase of the SVB debacle coming to a close, Congress and the country’s regulators have an opportunity to make the financial system safer—by insuring a wider range of deposits and restoring scrutiny to regional banks. The risk is that, knowing that the government will act as a backstop, bankers and investors will become more reckless, rather than less. And Congress needs answers from the Fed and the FDIC about why they were incompetent in heading off this crisis and had to scramble to fix things after the fact.
The SVB crisis was unusual in many ways. It did not involve a risky hedge fund or investment bank, but a plain old depository institution. It was caused not by leveraged bets on exotic derivatives, but by executives parking cash in some of the safest and most liquid instruments on earth. The precipitating event was not the slow accumulation of mortgage defaults or the sudden arrival of a deadly virus, but the Fed raising interest rates, something it does with perfect transparency (it holds a press conference every time it does it, for goodness’s sake). That makes the debacle all the more bewildering and galling—even if the cleanup ultimately costs the taxpayer not a dime, even if there is little to no financial fallout.
By last week, catastrophe may have been unpreventable. SVB had expanded rapidly during the COVID tech boom, as new depositors poured billions and billions of dollars into the bank. Unable to lend all that money out, its executives instead invested in simple government-backed or government-issued securities. Those securities, such as Treasury bonds, decline in value as interest rates rise. There are a number of ways to manage this kind of interest-rate risk; SVB’s managers did so incompetently. The red ink in their portfolio meant that the institution would struggle to make depositors whole if and when they wanted their money back. On a single day last week, panicked account holders demanded $42 billion. The bank went kaput.
The danger of such an event was obvious, at least to the green-eyeshade types in Washington and New York, as soon as the Fed began raising rates last year. Indeed, Martin Gruenberg of the FDIC described it in remarks in December: “The combination of a high level of longer-term asset maturities and a moderate decline in deposits underscores the risk that these unrealized losses could become actual losses should banks need to sell investments to meet liquidity needs.”
A number of analysts saw what was coming for SVB in particular, too. Raging Capital Ventures, an investment office, noted the bank’s catastrophic interest-rate problems in January, publicizing the findings on Twitter: “The bank would be functionally underwater if it were liquidated today.” Moody’s had been examining SVB for a downgrade. Both were working with data from public filings made by SVB’s corporate parent.
As Aaron Klein of the Brookings Institution has noted, the bank’s supervisors should have looked into other straightforward issues. The bank had become reliant on low-cost financing from a federal home-loan bank. Only a small sliver of SVB’s account holders were fully protected by the FDIC’s $250,000 deposit-insurance policy. Moreover, SVB had no chief risk officer for eight months last year—the year of the crypto crisis, the year that tech began to melt down. Many of the bank’s prototypical clients—venture capitalists, start-ups, and technology firms—were struggling and drawing down their accounts. And its chief executive officer had started cashing out his stock.
[Read: Silicon Valley was unstoppable. Now it’s just a house of cards.]
Of course, the country’s regulators would have been paying more attention but for Congress. In 2018, a bipartisan group of legislators gutted parts of Dodd-Frank, the regulatory-reform law passed after the 2008 financial crisis. Indeed, they specifically exempted midsize banks—like SVB—from certain stress tests and capital requirements, as those banks argued that they did not pose the same systemic risk as big banks did.
To stop any risk to the financial system, the Treasury, Fed, and White House this weekend agreed that the SVB crisis did pose a systemic risk. The response that they concocted over the weekend is competent, I suppose. It is a bailout, but one that won’t leave the taxpayer on the hook for anything. SVB’s equity investors got wiped out, and its executives have been fired. The government is protecting its account holders’ deposits and has ensured that there are no runs on other regional banks.
But the government should never have to use its emergency financial-stability tools to help save one crappily managed midsize bank. The FDIC should have shut SVB down days, even weeks, ago. The Fed system should have known that the bank was at risk of collapse and acted accordingly. No start-up should have faced the prospect of scrambling for cash or figuring out furloughs, just because they had a checking account at SVB. No midsize bank should have faced concerns that it might, too, face a liquidity crisis.
There’s no success story here. The complexity of financial regulations and the dullness of balance-sheet minutiae should not lull any American into misunderstanding what has happened. Nor should the lack of a broad meltdown make anyone feel confident. The bank failed. The government failed. Once again, the American people are propping up a financial system incapable of rendering itself safe.
That system might become even more cavalier in the future, knowing that the Fed will paper over problems on bank balance sheets and that public officials will not tolerate any risk to the deposit accounts that make payrolls. The risk is not that SVB is endangering the financial system. The risk is that incompetent supervision and a dearth of rules are.