Most remember where they were when JFK was assassinated on November 22, 1963 or when 9/11 happened. But few recall the day in 2008 when Lehman Brothers collapsed even though it also resulted in sweeping changes, financially and geopolitically. Likewise, March 10, 2023 is not seared in anyone’s memory but was when the Silicon Valley Bank (SVB) collapsed, the biggest U.S. bank failure since 2008 that has also sent jitters through the world’s banking system. SVB wasn’t considered a “too big to fail” rescue mission, but it threatened to become the Covid-19 of the banking world. Contagion was immediate — two more smallish American banks fell victim as did one of the world’s largest banks, Credit Suisse. But interventions by governments were immediate and will hopefully prevent a mass meltdown. Even so, another 100 U.S. regional banks are asking for help too and will get it. Markets will continue to roil and another banking crisis has begun.
Everyone remembers what happened the last time when shock, and delayed rescues, led to horrific carnage. This one is different because of better guardrails put in place after 2008 and because governments and regulators reacted instantly. But the bad news is that flash mobs also sprang up instantly on social media to fan the frenzy, imperilling other small banks but also giants with problems such as Credit Suisse which had to be merged days later.
Policy-wise, the “good” news is that – despite political shaming-and-blaming -- SVB’s troubles were not caused by the type of systemic deregulation stupidity that brought down Lehman and the entire financial structure in 2008. It failed due to managerial incompetence involving “mismatched assets”: The bank’s “ballast” consisted of blue-ribbon, long-term government bonds at lowish fixed interest rates even though its liabilities were deposits which were earning increasingly higher interest rates. So when large withdrawals began, the bonds hadn’t matured and their value had fallen due to rising rates, so it was technically bust. Put simply, its balance sheet was underwater as are, as it turns out, many other smaller institutions.
Back in 2008, the problem was different. Bank assets weren’t blue-ribbon bonds, but were mortgages and other instruments backed by real estate that collapsed in price. When values fell, they all tumbled over the cliff. By contrast, SVB had been identified for its dubious management practices and could have been quickly bailed out by the Federal Reserve’s local regional branch, in San Francisco. But it failed to act in time despite danger signs. Its laissez-faire attitude may have been partly cultural, because Silicon Valley is known for cowboy capitalism and excessive risk-taking. When deposits increased, to switch to stronger banks, and many were enormous, the run was devastating.
Washington reacted quickly and extended its $250,000 deposit insurance to all of SVB’s depositors, including one with $500 million parked there. But the damage had been done and now all regional banks want the same protection because they have been tarred by the same brush.
Senator Elizabeth Warren blamed the Federal Reserve’s Chair Jerome Powell, appointed by Donald Trump, for easing regulations on banks with less than $50 billion in assets which represents roughly one-third of America’s total. She stated that once regulations were loosened for them “the CEOs of the banks did exactly what we expected. They loaded up on risk that boosted their short-term profits. They gave themselves huge bonuses and salaries and exploded their banks.”
A former regulator said SVB’s failure was not about insufficient regulation. “It was terribly managed and its auditors, credit rating agencies, and regulators should have caught this. Even if regulations had not been lightened up, this bank would have failed.”
It’s a safe bet going forward that more bank runs and rescues will occur until the U.S. tightens up rules and ends up with a more highly concentrated and regulated banking system such as exists in Canada and most of Europe. Along the way, the crisis will be politicized, as is everything in the United States. “Unfortunately, the blame game has begun,” wrote Gary Cohn, former Trump economic advisor and Wall Street giant, in The New York Times. “Progressives claim that greater regulation would have prevented the failure. Others [Republicans] claim that the failures were the result of a shift in regulatory focus from prudence to socially oriented directives. Both claims are off base.”
Obviously, relaxing regulations provides cover for poor banking practice. Since the collapse, depositors have fled smaller banks or those with large “unrealized gains” in their asset base such as fixed rate bonds. But a few large banks, like Credit Suisse, with known problems will also fall by the wayside which is why the Americans must strictly regulate their entire financial system. What’s been demonstrated this time is that lots of smaller banks with fewer rules, doesn’t strengthen the system or economy. It weakens it.
Naturally, stock markets fell after March 10 and will do so for a while. This is predictable. As the salty old stock market adage says “when the cops pull up to the brothel to arrest the girls even the piano player is loaded onto the paddy wagon”. Bank stocks aren’t a good bet as yet and there is already bottom-feeding going on as investors buy big strong banks that have fallen in price because that’s what happens in panics. They anticipate that this isn’t 2008, which it likely isn’t. But what’s worrisome is that this disruption adds to the possibility of a recession, given the current geopolitical backdrop. Russia’s war against Ukraine and the West won’t end soon and drains government coffers; Russian blackmail has caused food and energy inflation worldwide; and higher interest rates are rapidly raising the amount of consumer and government debt worldwide.
“The storm had been quietly building for months,” wrote Hong Kong’s Asia Times. “Even before SVB capsized, investors were racing to figure out which other banks might be susceptible to similar spirals. One bright red flag: Large losses in a bank’s bond portfolios. These are known as unrealized losses — they turn into real losses only if the banks have to sell the assets. At the end of last year, U.S. banks were facing more than $600 billion worth of unrealized losses because of rising rates, federal regulators estimated.”
Little wonder that the U.S. Federal Reserve is now offering loans to shore up banks stuck with sagging bond values as a result of increasing interest rates. Besides help, bankers will face more scrutiny, more rules, more “stress testing”, and some will be forced to merge. It’s not a a pretty picture, but it isn’t time to put your savings under your mattress or in gold bars. This is not a Lehman moment, but is just another reminder that capitalism doesn’t work without guardrails, interventions, and government support. What Churchill said of democracy, also applies to so-called free enterprise: “It’s the worst system — except for all the others that have been tried.”
SVB was an obvious mess- poor risk management strategy, poor funding strategy, concentration risk..aside from silly politics over woke lending or such nonsense, there may be some good from it- a kick in the rear to an entitled generation showing bad things can happen..
Excellent reporting. CEOs and their minions should be paid a salary and all options or shareholdings should be considered long-term investments, the holding period of at least 5 years. Short-term profits must be taken out of the equation along with excessive risk taking. Billions can be moved electronically in a nano-second, so banks need that liquidity (asset liability management controls) and/or access to Central Banks. The guard rails must be re-assessed. Just brace yourself for crypto losses in the future.