March 13, 2023

Silicon Valley Bank

The U.S. administration stepped in on Sunday with a series of emergency measures to shore up confidence in the banking system after the failure of Silicon Valley Bank (SVB) threatened to trigger a broader systemic crisis…

“The collapse of SVB - the largest bank failure since 2008 - sparked concerns over whether small-business clients would be able to pay their staffs, with the FDIC only protecting deposits of up to $250,000. Some 89% of SVB's $175 billion in deposits were uninsured as the end of 2022, according to the FDIC. All depositors, including those whose funds exceed the maximum government-insured level, will be made whole.” Reuters

Both sides are critical of SVB’s risk management practices:

The underlying problem was a straightforward lack of diversification… SVB’s clientele is heavily concentrated in the tech industry, which boomed during the pandemic. That led to a dramatic increase in SVB’s books: The bank went from having $60 billion in deposits in 2020 to more than $200 billion in 2022. Normally, banks take such deposits and lend them out, charging borrowers different interest rates depending on their creditworthiness…

“But relatively few firms and individuals were seeking such bank loans in the Bay Area at the time, because the whole ecosystem was so flush with cash. [So] SVB parked the money in perfectly safe government-issued or government-backed long-term securities… so safe, it seems, that the firm failed to hedge against the risk that those bonds might lose value as interest rates went up. Which is exactly what happened… This was mismanagement on SVB’s part. ‘What happens if interest rates go up?’ is not an arcane question for a bank to have to answer, nor is ‘Are we adequately diversified?’”
Annie Lowrey, The Atlantic

“SVB intentionally decided not to hedge its interest-rate risk. This is shocking given that its $120 billion securities portfolio had a duration of 5.6 years, meaning a 200-basis-point increase in the five-year rate would equate to a $14 billion loss, roughly equal to SVB’s entire capital base… CEO Greg Becker should have known better too. Until Friday he was a board member of the San Francisco Fed. He was also savvy enough to sell $3.6 million in stock days before his bank collapsed…

Startup executives must [also] do better in managing financial risks and diversifying across counterparties. Many tech founders were also financially rewarded for banking with SVB… Silicon Valley entrepreneurs want to move fast and break things, but we shouldn’t let them break public trust as a long-shot maneuver for a special bailout. That isn’t how capitalism works.”
Vivek Ramaswamy, Wall Street Journal

Other opinions below.

See past issues

From the Left

“A key rule in the [2008 Dodd-Frank] law required that ‘Too Big To Fail’ banks—which Dodd-Frank defined as those with more than $50 billion in assets—undergo stricter oversight, including higher capital ratio requirements designed to shore up the big banks’ ability to withstand financial shocks…

“Becker, along with several other banking executives, asked senators to raise the threshold for banks that should be subject to this expanded level of supervision from $50 billion in assets—a milestone his bank was quickly approaching—to $250 billion…

He argued that there was no need for these expensive, federal-government-mandated checks because SVB’s activities had a ‘low risk profile’—and because the bank was perfectly capable of keeping itself in check with its ‘strong risk management practices.’… Fast forward to 2023. With about $209 billion in assets, SVB has continued to operate below the bar where they’d be subject to stricter risk checks.”

Hannah Levintova, Mother Jones

“In the months before Silicon Valley Bank’s collapse, the bank’s lobbying groups [also] fought a proposal requiring financial institutions to increase payments into the Deposit Insurance Fund… Lobbying groups representing Silicon Valley Bank, or SVB, argued that risk of bank failures is low and insisted that requiring banks to pay more into the fund would harm financial institutions’ bottom lines…

“At the time, the Deposit Insurance Fund (DIF) had less than $126 billion to insure the nearly $10 trillion of insured deposits in America, meaning the reserve ratio was below the statutory 1.35 percent minimum. Nonetheless, soon after the bank industry’s letter, a group of senior Republican House lawmakers — including some of the chamber’s top recipients of banking industry campaign cash — parroted the financial industry’s rhetoric…

“[These] lawmakers received a combined $942,000 of campaign donations from the banking sector in the 2022 election cycle.”

Julia Rock & David Sirota, The Lever

From the Right

“Everyone, except SVB management it seems, knew interest rates were heading up. Federal Reserve Chairman Jerome Powell has been shouting this from the mountain tops. Yet SVB froze and kept business as usual, borrowing short-term from depositors and lending long-term, without any interest-rate hedging… [Another mistake] was not quickly selling equity to cover losses…

“Then there’s this: In its proxy statement, SVB notes that besides 91% of their board being independent and 45% women, they also have ‘1 Black,’ ‘1 LGBTQ+’ and ‘2 Veterans.’ I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands… Management screwed up interest rates, underestimated customer withdrawals, hired the wrong people, and failed to sell equity.”

Andy Kessler, Wall Street Journal

“Defenders of [the emergency measures] will try to make it seem as if it’s an extraordinary, one-off decision by regulators, but in practice, it has created a huge moral hazard by signaling that the $250,000 FDIC limit on deposit insurance does not exist in practice. The clear signal it sends is that when financial institutions make poor decisions, the government will swoop in to clean up the mess…

“This was not a case in which the whole economy would be threatened if an intervention were not taken. There would be disruption to a number of companies in the tech sector and their employees, as well as potential problems for similarly situated financial institutions. But the vast majority of banks are well capitalized right now, and there is no credible risk of this causing a complete financial meltdown…

“[This] will just add to the talking point that when Wall Street or well-connected tech companies are in trouble, the government swoops in to the rescue. And yet lawmakers won’t eliminate student debt, give away free health care, pay for child care, guarantee affordable housing . . . and insert whatever cause you like. If you support socialism for tech companies, don’t be surprised when you get it for everything else.”

Philip Klein, National Review

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