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On the risk of Silicon Valley Bank 'Hot Takes'
Patience is a virtue
Last week I posted an article titled “What Happened to Silicon Valley Bank”. That post covered the facts surrounding the collapse of Silicon Valley Bank (SVB), the biggest bank failure since the Great Recession. I have a feeling most readers already knew the basics of the story, but I wanted to give some context before posting my thoughts on SVB.
My main thought is “wait and see until we know what happened”.
It’s easy to jump the gun and respond with outrage on the collapse of SVB. Since the 2008 financial crisis, it’s been fun to target bankers. Bankers also don’t do themselves any favors by drinking champagne when people protest outside their buildings. But in this case I think it’s a mistake to do so right away.
SVB was a very unique bank. It catered to the tech industry and didn’t take a lot of deposits from individuals. As I described in my last post, this combined with the recent Fed rate hikes to put them in a bad position, and the bank failed when depositors panicked and started a bank run. Predictably, that led to newspapers like the Washington Post running articles with the headline “In the Silicon Valley Bank debacle, greed and fear ruled, not the rules.”
But let’s look at the claims that are being made by Charles Lane in the WaPo article. He notes, as many others have, that a 2018 law change meant that SVB would no longer be required to pass annual Fed stress tests (something that often gets left out here is that the Fed still could assess SVB the same way as the biggest bank, they just were no longer required to). According to Lane, if the bank would have been subject to the same oversight as systemically important banks then “maybe” they would not have collapsed, although this is “not self-evident”.
This is the problem I’ve seen throughout the media. People say that greed and lack of regulation caused SVB to collapse, but then that claim is never supported in the article. Of course more regulation “might” have prevented SVB from failing, just like less regulation “might” have.
Aside: other gripes about Lane’s article. He says:
The Biden administration maintains that this is not a taxpayer bailout, because the government paid off depositors from a cash reserve funded by a fee on the financial sector, but that’s a half-truth: It’s essentially a tax on banks they pass along to customers.
Well, yes, that’s how the system works. Everything ultimately comes back to the consumer. the SEC fined corporations and individuals a record $6.4 billion in 2022. Is Lane seriously arguing that that’s a bad thing because ultimately the costs will be passed onto consumers? Banks should be fined when they don’t follow financial regulations. Nestle should be fined when they break campaign financing rules, even though that means food prices will go up. The logic Lane is using makes no sense.
Finally, Lane doesn’t even try to give evidence that fear drove SVB to make its decisions. The word fear doesn’t even appear in the article except when paired with greed!
I know everyone uses clickbait headlines, but I’m still disappointed when reputable publications resort to them.
There’s also a lack of context regarding SVB’s situation in many articles. It has been widely reported that the bank spent most of 2022 under a supervisory review. The Fed had noticed that many of their treasury bonds were longer term than the typical bank was buying, and given that interest rates were rising this could create problems down the road. The context I need is how serious these warnings were. When a group of customers gets sick after eating at a restaurant, you usually don’t see headlines about how the local food inspector had warned the business they weren’t in compliance with everything. That’s because every restaurant is out of compliance with something. It’s impossible to follow every rule and regulation regarding food safety; they are insane.
What I want to know is how many banks receive this type of warning. Is it common or rare? There are many levels of warning that most regulatory agencies offer; was this just a caution or a “change your behavior immediately” type warning? The lack of context across the board makes me think 1) financial journalists don’t know themselves or 2) financial journalists know these warnings are issued all the time but want to make it look something nefarious was happening.
The fact is that banks should fail every so often. Just like regulation can be too loose, it can also be too tight. Elizabeth Warren said:
“I predicted five years ago the consequence of that kind of weakening would be that we see these banks load up on risk, build their short term profits, give themselves ginormous bonuses and big salaries and then some of those banks would explode.”
First, a few things happened between 2018 and 2023 that nobody saw coming and that had at least minor effects on the US economy. So any prediction in 2018 could be right for the wrong reasons. That said, even granting Senator Warren her premise, I disagree with the conclusion. If there is an existential banking crisis every decade, then banks are taking too many risks and more regulation is needed. If no bank ever fails, that means banking is too regulated and new entrants are being prevented from entering the industry. If the 16th largest bank in the US fails every 15 years or so, that sounds about right to me.
This could be a one-off event, where a bank that was used by a unique industry took heavy losses after unprecedented interest rate hikes and failed. It could also be that SVB was engaged in practices that the Fed should have monitored more closely. Or it could be that SVB used a strategy that was destined to cause problems eventually and banks need to be banned from ever using that strategy again. In the first case nothing should be done, in the second the Fed needs to increase compliance with existing regulations, and in the third new regulations are needed. My gut instinct right now is that the second case is most likely, and that current regulations are suitable as long as they are effectively enforced.
Someone I know in fintech told me, “All we can say for sure right now is that from a risk-management perspective, SVB was not following best practices.”
I think we can all agree to that. For anything else, let’s wait and see.
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