Silicon Valley Bank (SVB) failed on Friday, March 10, 2023.
Government officials scrambled to reassure the public their deposits aren’t in danger. Are they? At the larger banks, at least, probably not.
To begin with, the FDIC insures individual depositors against up to $250,000 of losses. This doesn’t come from taxpayers; FDIC is an insurance program, supported by premiums paid by banks. But at SVB, many depositors were tech companies with much larger accounts.
For example, if a tech startup sold $50 million of stock and deposited the proceeds to SVB, and that money disappeared, the company would go under, its employees would lose their jobs, customers would be left high and dry, and shareholders would lose everything.
To prevent that, Treasury Secretary Yellen, no doubt with White House approval, announced over the weekend that the government would guarantee all SVB accounts and depositors could withdraw their money beginning Monday (see story here).
Socialism? No, pragmatism. It’s about saving those companies and jobs, and preventing disruption to countless lives. All of the people impacted by SVB’s collapse are taxpayers, too. It’s also about preventing “contagion” from spreading in the banking system (see story here). Fear is contagious.
And by the way, if losses have to be covered Wall Street, not taxpayers, will cover them (see story here).
SVB wasn’t the only bank to hit the skids that weekend. Government regulators also shut down teetering New York-based Signature Bank (SB), and made similar deposit guarantees, for the same reasons.
Bank closures aren’t unheard of, but these weren’t small banks. SVB and SB were the second and third largest bank failures, respectively, in U.S. history. Only the Washington Mutual (WAMU) collapse in 2008 was larger. SVB and WAMU both failed because of bank runs — too many panicky depositors trying to withdraw their money all at once.
But as dramatic as two large back-to-back bank failures are, it’s unlikely they signal that serious problems exist in the banking sector. Both had specialized business models; SVB financed Silicon Valley startups, while SB had major businesses in wealthy clients and financing cryptocurrency trading.
Barrons, a weekly financial publication, explains, “SVB’s woes stemmed from being hit with $1.8 billion in losses as it liquidated about $21 billion in Treasury and mortgage-backed securities, which decreased in value because of the Fed’s rate hikes over the past year.” (Barrons, March 13, 2023, print edition, at page 7).
Stanford business professor Darrell Duffie says “there were failures of risk management and regulatory supervision. And there are likely some other banks whose balance sheets have been similarly weakened by the rapid increases in interest rates, which dramatically diminished the value of Treasuries and mortgage-backed securities” (see story here).
Generally speaking, the market value of bonds and other interest-bearing financial securities goes down when interest rates go up, which meant these banks couldn’t raise as much cash by selling the securities on their books.
But while this is true of all banks (and also pension funds, insurance companies, and other institutional investors), it doesn’t affect them equally. While the Federal Reserve’s efforts to tame inflation with rapid interest rate increases “poses a challenge to all banks,” the major commercial banks are less vulnerable because they have “diversified client bases and funding sources, broader business models, a lot of capital, are better managed, and have more regulator oversight.” (Barrons, March 13, 2023, print edition, at page 12).
Prof. Duffie says, “Despite the panic over SVB’s collapse, this situation isn’t likely to morph into a broader banking crisis. Since the collapse of Lehman Brothers in 2008, the largest US banks have been forced by regulators to be much more resilient. They also rely far more heavily than SVB on retail depositors, who tend to have a greater share of their deposits covered by FDIC insurance and are less prone to run at the first sign of trouble.”
What he’s saying is SVB’s and SB’s depositors panicked because they had much more on deposit than the $250,000 insured amount. These weren’t Average Joe depositors; they had millions at risk. But don’t forget that FDIC, although self-supporting and not needing taxpayer money for its ordinary operations, is a government program.
There are ideologues, and then there are people who just want things to work. I’m in the latter camp. Government regulation, and at times government intervention, is a necessity. Meat wouldn’t be safe to eat without government inspectors; your bank accounts wouldn’t be safe without government deposit insurance (and, when necessary, government intervention and bailouts). Which do you want, safety or ideological purity?
SVB and SB were specialized banks that weren’t managed as well as they should’ve been, and more to the point, weren’t regulated as much as they should’ve been. That’s because Republicans, with complicity of 33 House Democrats and 17 Democratic senators, passed Trump-backed legislature in 2018 that weakened regulation of entities like SVB and SB (see story here).
The general banking industry is both better managed and more regulated than those entities. Don’t let politicians tamper with bank regulation in the name of ideology. That’s what caused the savings and loan abuses of the 1980s and the financial crisis of 2007-2008. And it was bank runs, at a time when banks were neither insured nor regulated, that triggered the Great Depression.
Capitalism isn’t the best economic system; regulated capitalism is. Human nature being what it is, some people will take advantage of the absence of rules and enforcement. Imagine what our streets would be like without traffic laws and traffic cops. Imagine what banks would be like without bank regulations and regulators.
You don’t have to imagine. We just saw what happens when banks aren’t regulated enough. Be glad your bank probably is.
Related story: Nikki Haley, who’s running for president but flailing to find a platform to run on, attacked Biden’s and Yellen’s backstopping of SVB — which costs taxpayers nothing — as a “bailout” — which it isn’t, showing how ignorant she is about the banking system and the danger to the financial system if she’s in charge. Read that story here.
Photo below: Is “sorry, no money today” what you want to hear from your bank?
