McManus: Silicon Valley bank collapse could be a blessing
In the brief but spectacular collapse of the Silicon Valley bank, we may have just witnessed the best banking crisis in history.
It might even have been helpful.
No one was seriously hurt, except for bank executives who made bad decisions and shareholders who did not pay attention to it.
Those Silicon Valley libertarians who have been demanding for years that the government get out of the way deserve retribution when they begged the Federal Reserve to save them. “Where [Federal Reserve Chair Jerome H.] Powell? Where [Treasury Secretary Janet L.] Yellen? Stop this crisis NOW.” David Sachs tweeted. a tech investor who was a fan of creative destruction until it got too close to his bank account.
Just as there are no atheists in the trenches, there are no libertarians in a financial panic.
Republican politicians add a touch of comedy by blaming an imaginary threat for SVB’s financial blunders “woke up banking.” There is no evidence that the political leanings of the bankers, “woke up” or otherwise, have affected their balance sheets.
The rest of us have been given a useful reminder of why market capitalism needs to be regulated: to protect the little person (and sometimes the not-so-small person) from disaster.
Most importantly, the Fed and the Federal Deposit Insurance Corporation. (FDIC) has received a wake-up call that their oversight of midsize banks has been dangerously weak.
The collapse of the SVB, as frightening as it may be, could be a useful adjustment to excessive bank deregulation, similar to a short-term health crisis that encourages people to exercise more and eat better.
Despite the staggering complexities of high finance, SVB’s story turned out to be fairly simple. The bank invested too much money in long-term government bonds, which fell in value when interest rates rose. This left SVB without sufficient assets if a group of its contributors decided to withdraw their money at once, which they did.
But the SVB vulnerability should not have come as a surprise. The bank disclosed its problems in public financial statements last fall. The Wall Street Journal published an article about the asset squeeze in November, nearly four months before the tech brethren panicked.
The mystery is why neither SVB chief executive Greg Becker nor the federal and state agencies tasked with regulating the bank took action to avert the crisis. The Fed or the California Department of Financial Protection and Innovation may have required SVB to raise more capital last year when it was less vulnerable. They didn’t.
“Regulators slept on the switch,” Lawrence J. White, said a banking expert at New York University’s Stern School of Business to my colleague Don Lee.
When SVB’s big savers started stampeding early this month, it was already too late.
For Powell and Yellen, the Palo Alto panic raised the threat of massive runs on other medium-sized banks across the country.
So they stepped in, arrested SVB, and said they would guarantee all bills, even those over the $250,000 FDIC insurance ceiling.
This qualifies as a rescue. It will be paid by fees on banks instead of tax dollars, but each bank customer will share the invisible cost.
However, it was better than the alternative: more banking panics and more damage to the economy.
The decision to cover more than $250,000 in uninsured deposits sparked hand wringing over “moral hazard”. In theory, capitalism regulates itself when risky behavior—for example, placing too much money in one bank—is punished. If the government bails out people who make bad bets, they have no incentive to avoid taking unnecessary risks.
But the rescue of the SVB was not unprecedented. The FDIC and the Fed have quietly bailed out the majority of uninsured depositors since 2008.
Becker will get a chance to explain himself at a congressional hearing, the Capitol Hill version. Walk of Shame on Game of Thrones. Presumably, he will be asked if he is really too awake to notice that his long-term bonds are depreciating.
Regulators will also be called to account by more than just longtime critics like the senator. Elizabeth Warren (Massachusetts). Last week, a dozen senators, including Kirsten Cinema (Arizona) and J. D. Vance (R. Ohio), asked the Fed why it did not investigate the SVB.
There is already a list of possible fixes. Congress may reintroduce so-called stress tests for midsize banks, a rule it repealed in 2018. The Fed may reintroduce liquidity requirements for these banks, a rule softened by Powell in 2019. bank accounts for the cost.
Testing Coming in Six Months: Is the Fed Doing More? Even banks? And do voters pay attention?
The fluctuations in the banking system have not ended. The government is still trying to sell what’s left of the SVB. San Francisco-based First Republic Bank still looks shaky, even after injecting $30 billion in deposits.
But at least for a moment the rest of us can breathe a sigh of relief. If all financial crises were resolved as quickly as this one, capitalism would be less scary.