With hindsight, there were warning signs ahead of last week's spectacular collapse of Silicon Valley Bank, missed not only by investors, but by bank regulators.
Just why the oversight failed remained a hot question among banking experts Monday, with some focusing on the weakness of US rules.
The Federal Reserve announced Monday plans for a "thorough, transparent and swift" review of the supervision of SVB that will be publicly released on May 1, effectively acknowledging that it could have done better.
President Joe Biden promised a "full accounting of what happened," adding that he would ask regulators and banking regulators to tighten rules on the sector.
Banking experts have been among those alarmed at the rapid collapse of SVB, the country's 16th biggest bank by assets and how its demise became a harbinger of Sunday's failure of another lender, Signature Bank.
The failures have "exposed the inadequacy of regulatory reforms that have been made since the global financial crisis," said Arthur Wilmarth, a law professor at George Washington University.
A once-over of the bank would have pointed to clear potential red flags in SVB's disproportionate exposure to tech startups, a risky area that can be likened to commercial real estate or emerging markets -- areas that have plagued lenders in the past.
Wilmarth noted that SVB grew very fast between 2020 and 2022 and that its exposure to long-date fixed interest bonds made it especially vulnerable to the a shift in monetary policy by the Fed.
"That's almost a sure proof formula for failure. If the economy turns you begin to have trouble," Wilmarth said. "None of those would have been a mystery to the regulators."
Experts pointed as well to the eventual easing of U.S. laws enacted soon after the 2008 crisis.
The original Dodd-Frank law of 2010 imposed higher capital, liquidity and other requirements on banks with at least $50 billion in assets.
In 2018, with support from former President Donald Trump, this requirement was raised to $250 billion, affecting fewer banks.
But that shift in law does not excuse regulators for these failures, according to Anna Gelpern, a law professor at Georgetown University.
"When regulatory requirement are relaxed either by the premise that those institutions don't pose a risk to the system because of their size or that they are easier to supervise, that puts much more pressure on old-fashioned supervision because you don't have the automatic alarm that goes off with the requirements," she said.
"If this was clearly unsafe and unsound behavior," the banks' official designation in the law "does not excuse a failure of supervision," she said.
Michael Ohlrogge, an associate professor of law at New York University, said regulators as a matter of course assign "very little to zero-risk weight" in terms of bank capital requirements for Treasury-linked securities because they are considered safe.
At the same time, regulators are also lenient with banks with regard to depositors with more than $250,000 -- the threshold for federally insured deposits -- believing the bank has a meaningful business relationship with such clients.
"That's probably going to warrant revisiting and thinking more seriously about the run risk of uninsured deposits," Ohlrogge said.
© 2023 AFP
38 Comments
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dagon
Thanks Trump!
The financialization of the economy with neo-liberal 'reforms' has gone on too long and there need to be arrests, confiscations and nationalization of assets if banks keep of relying on the guarantor of the public treasury for financial gambles.
Yrral
Most bank will not give 10000 in cash,if you needed it and all ATM were down ,that why you should have a month supply of hard cash in hand at least a month salary
Moonraker
Because, in capitalism the interests of investors always unfairly supersede the interests of workers, suppliers and customers. This is the 800 pound gorilla that always sits in the corner. They infiltrate politics and regulatory systems to ensure their needs are met. Funnily enough, whenever there is a crisis, the erstwhile libertarians - otherwise dismissive of government and "red tape" - are always quick to want the government and taxpayer to save them. Never trust an economic libertarian.
Open-minded
Trump; who bragged about gutting Dodd-Frank, who gutted the train regulations, and who removed the and defunded the team monitoring infectious diseases in ChIna; was jealous because Pres. Obama joked about Trump's incompetent and unethical behavior.
In return, Trump gave us two bank failures, train wrecks that caused environmental disasters, a world-wide pandemic, an insurrection, and a poor economy. Not to mention, the countless deaths in the US and abroad.
Every time another disaster happens, Trump tries ti control the narrative like criminal returning to the scene of a crime.
Trump's purpose is pretty obvious!
It only took 4 years for Trump to Make America a Ghastly Abberation (MAGA).
Blacklabel
Uh huh sure.
“it’s Trumps fault” is valid.
comments about the political leanings and donations and ideologies of the actual people running the bank that led to the failure?
that’s “off topic”.
couldn’t Joe have changed the policy in the last 2.5 years he has been a resident of the White House?
Antiquesaving
The Media has mostly towed the government line as are the mainstream economist.
We are now at 3 Banks, SVB, Silvergate and now Signature.
MSM are going with the narrative given by the Biden government that it was due to cryptocurrency.
But the reality is for SVB it wasn't cryptocurrency it was the multiple high rates of interest rate hikes and "Bonds" purchased before the multiple rate hikes make every bond a serious loss more each day.
Silvergate was cryptocurrency but again not trading but they were crypto payment facilitators and when the government started blaming crypto people got nervous and told their money out and that was a run on the bank not bad crypto investments.
Signature Bank was even worse Signature Bank barely had anything in crypto 16% of their business came from crypto businesses but they did not invest in crypto their collapsed was again due to the government's attempt to shift the blame from their poor interest rate policies to the word cryptocurrency.
Signature banquet solid until the rumors spread that crypto was the problem and again we had a run on the bank no Bank in this world can survive if people start pulling their money out it's just a fact.
No Bank actually has your money so we're going to see more Banks collapse and we're going to see more runs due to poor financial policy and more interest rate increases more rapidly.
lincolnman
After the last Repub-led financial meltdown in 2008, Dodd-Frank put regulations in place that limited banks from lending money to speculative investments - Trump and the Repubs repealed all those at the behest of their Top 1% rich globalist backers...
The fault lies entirely with Trump and the Repubs...
Two things guaranteed - put a Repub in the WH and you'll have a war and/or a financial crisis...
wallace
Japanese bank yen accounts are government guaranteed. ¥10 million per account. The republicans deregulated banks.
dagon
Because of instead of the real culprits at Goldman Sachs with their legacy .gov positions in the Neo-liberal hierarchy across Trump (drain the swamp) or Biden/Obama banker oligarchy only prosecutes outliers.
https://interactive.wttw.com/playlist/2017/09/11/only-bank-prosecuted-08-financial-crisis
Blacklabel
Liberal hero Gavin Newsom had several accounts. Which he didn’t disclose as he lobbied Biden to give all the depositors their money back.
Including, conveniently, his and his wife’s and his business.
dagon
Was it the woke libs? Or Trump's deregulation?
Congratulations, in Trump and Obama and Biden and Bush admins bankers are privatizing gains from taking financial gambles while socializing the losses.
Sad about Newsom and happy about Trump?
dagon
Glad to hear that you are happy that bankers which give money to Trump or Biden or woke neo-liberals so they can make financial gambles and make big gains, while socializing any losses, are fine in your book.
If you are an American taxpayer, you are the guarantor at the casino!
Congratulations on your lib-owning.
Cards fan
I don't think I've seen anyone, anywhere say it's just because of Cryptocurrency. Sure with some of the banks that's the case, but certainly not so with SVB.
The main problem is bad management, and the deregulatory policies that the Trump administration enacted. Who could have imagined that rolling back stress test requirements might cause negative outcomes?
mrtinjp
A once-over of the bank would have pointed to clear potential red flags in SVB's disproportionate exposure to tech startups, a risky area that can be likened to commercial real estate or emerging markets -- areas that have plagued lenders in the past
Well Tech Startups have nothing in common with commercial real estate or emerging markets, It is now very clear that the VC's finding the startups initiated the bank run resulting in the collapse.
https://www.afr.com/companies/financial-services/bitter-betrayal-vcs-blamed-for-svb-collapse-20230314-p5cs04
Jonathan Prin
Greed over wisdom.
Yrral
The Fed Reserve is the money maker,the Fed oversee the printing of currency along with the US Treasury,most bank are members of the Federal reserve,if want 100 billion dollars in bills ,they will print it as long as you pay them up front,but you are responsible for it being ship Google Ordering Money From The Federal Reserve
fxgai
Well, regulators are just people, they are not omniscient and expecting them to stop any problem from happening ever sounds like a Disneyland fantasy.
This is a dopey assumption.
If you take a deposit from someone, buy a long term bond with the money to earn some returns with which you can pay some interest to the depositor, that is great… but didn’t the bank’s risk managers know that the FOMC was raising interest rates, and that higher rates reduces the market value of those bonds?
They are “safe” if you hold them to maturity and the government can print money to pay you back in the worst case. But it doesn’t mean that the bonds can be sold for what they were purchased for.
This is no secret. The bank’s risk management should have been aware of such basics. If the regulators had any brains they would be running an operation themselves, not pretending to do oversight from the outside with less information.
Paul
Because lessons have not been learned!!!
mrtinjp
This is no secret. The bank’s risk management should have been aware of such basics..
Well the priorities for the head of risk management were very different..
https://nypost.com/2023/03/11/silicon-valley-bank-pushed-woke-programs-ahead-of-collapse/
TokyoLiving
The barn is burning.. Slowly..
Antiquesaving
Really did you miss Biden and Yellen?
Headlines NY Times
CNBC
This is just one CNBC has plenty.
But I am not going to bother with posting more.
Look it up
Cards fan
So you start in on Bidne and Yellen and then post articles for independent media reporting the news, and not what Biden or Yellen said. Odd. It's also odd that cryptocurrency wasn't mentioned by anyone prior to your post.
Anyway, Signature bank was heavy in cryptocurrency, which is incredibly volatile. This was very stupid for Signature bank to do.
Cards fan
lol This silly argument again? Go ahead and look up the board at SVB, and then talk to me about "woke culture."
Also, you've got your facts wrong, because the UK branch ain't the "head of risk management."
Clay
Like ANY true disaster, series of mistakes, events circumstances, bad actors, bad luck, etc. that over a period of time ended up 'snowballing' out of control.
Best advice ALWAYS learn from others, eg. SVB's mistakes, now that's REAL wisdom!
Antiquesaving
Again false!
It had 16% of its business with Crypto and none of it as investment solely as clients.
Do a better job, you first said no one said anything then say it was heavily into crypto both false.
lostrune2
When in 2018, the standards were loosened up, these mid-size banks are no longer subject to the stress tests that larger banks are required to pass
These banks become free-er to do want they want. But that also includes they're free-er to fail
The USA Today has a pretty concise explanation with graphics:
"Silicon Valley Bank collapse explained in graphics"
https://www.usatoday.com/story/graphics/2023/03/13/graphics-bank-collapse-silicon-valley/11466073002/
lostrune2
Fortunately so far, the authorities seem to be on top of this
The action-response plans implemented after the 2008 Financial Crisis are swiftly being put to good use, and keeping this crisis manageable
So far so good, the rest of main-street America hasn't much concerned of this
Clay
One must also never forget that Silicon Valley, Crypto, tech, VC in general and of course Cali in particular all overwhelmingly support the d's, based on their campaign contributions, the political make-up of the entire state being d's, etc.
Recall Sammie Bankman 'Greed', he even banked at SVB and exactly like SVB was a HUGE donor to the d's, all the way to the TOP both in state and DC, only Sammie the cockroach was new to the game unlike SVB with a 30 year plus history!
Regarding how 'regulators' missed SVB, see above, because 'regulation' equals 'taxation' in these $GREEDY$ circles. If SVB had been massive donor to r's you can bet your last yen this situation would have been properly 'regulated', as this set donates to get a 'regulation pass', that's the tax free 'dividend', that's the game on K-street folks, but none of you have set foot there, right? Yet you know it all I'm sure, amazing!
Media narrative that it's all 'Trumps fault', crazy guy with orange hair, pretty rich, but the point is it sells within the 'echo-chambers' like here, while actual facts not so much...
Cards fan
Lol again, not false. Having 16% of your balance sheet wrapped up in assets that can swing up or down in 30 plus percent in over the course of a week or two is a good way to go broke. Hence Signature bank being shut down.
Bob
It appears that it's everyone's fault BUT the banking industry's.
The only one who is responsible for this is the basic principle of a bank, where they decide to loan out money that's not theirs, and consequently have a lot of unsecured deposits.
Banks are failing because of basics, which means that the basic principle of a bank is flawed. If those institutions have a realistic chance to fail, which they do have, then the system needs to be replaced. Simple as that.
Why should I pay someone to take care of my money? Why should I let that someone lend away my money? Should I just watch as they complain when I want to withdraw more than $5k of it? Are we supposed to simply accept that they charge us overdraft, transaction, banking fees etc. for almost no service provided?
If you take a closer look, you'll see that banks are pretty much worthless for the working class.
Clay
banks have been 'genius' at paying of the politico's, they're turning this SVB debacle into an attack on digital currencies for example.
It's your class legacy cash cow corrupt monster 'rigging the game' in order TO RIP YOU OFF!
Clay
Plus, if they ever have BIG problems, taxpayers will pay for it, SVB had roughly $20B in 'investment' losses, gambling with other people's money. Naturally the US Central Bank 'decided' to buy back these assets at FACE VALUE/NO LOSSES!
Hakman
Go Woke, Go Broke
https://newsbusters.org/blogs/business/renata-kiss/2023/03/14/watch-fox-news-home-depot-co-founder-slams-woke-silicon?fbclid=IwAR0drg1mNEOsJe-XryQ5tTUWp3UaTsWsmCBhRJxrkMjh8VhYywcfe_J8KMI
California’s woke Silicon Valley Bank went belly up last week, showing the inevitable consequence of ESG policies, according to HomeDepot co-founder Bernard Marcus.
On the March 11 edition of Fox News Cavuto Live, Bernard Marcus, co-founder of The Home Depot, slammed Silicon Valley Bank’s (SVB) woke practices that led to its recent collapse.
“These banks are badly run because everybody is focused on diversity and all of the woke issues and not concentrating on the one thing they should, which is shareholder returns,” said Marcus. “Instead of protecting their shareholders and their employees, they’re more concerned about social policies.”
SVB closed down March 10 after 40 years in business and its closure is considered the largest bank failure since the 2008 financial crisis, per Reuters.
But Marcus suggested that perhaps the bank’s collapse can help reveal the true state of the American economy.
“Maybe the American people will finally wake up and understand that we’re living in very tough times, that in fact, the recession may have already started. Marcus added, “I feel bad for all these people that lost all their money in this woke bank.”
When asked if there are more woke banks out there, Marcus said yes, adding that, “the system and the administration has pushed many of these banks into [being] more concerned about global warming than they do about shareholder return.”
Marcus is right on point. Just last year, 19 states investigated six U.S. banks for working with the U.N. to deny credit to fossil fuel-related companies. More recently, the Royal Bank of Canada instituted “climate modifier” bonuses for its top executives as part of their ESG agenda.
Antiquesaving
Again can't read can you.
16% of their clients, no assets!
Signature was solide it released a full statement of all its accounts to prove it but sadly the rumours of it being a Crypto bank like Silvergate and people panic withdrawals caused a run once a run starts the end is near Crypto or no Crypto .
If you don't understand the difference this guy explains well
https://youtu.be/_bUcyfvysWo
If not read the statement on assets.
https://www.businesswire.com/news/home/20230309005525/en/Signature-Bank-Issues-Updated-Financial-Figures-as-of-March-8-2023-Reiterates-Strong-Financial-Position-and-Limited-Digital-Asset-Related-Deposit-Balances-in-Wake-of-Industry-Developments
quercetum
He who doesn’t look gets took. It took Tesla months (10 months if I remember correctly) to build a factory in China but could not build one in Germany in 2 years; too much politics. UK also made similar comment re UK rail. Banks failed in estimating time.
Time is literally money. A once-over of the bank would have pointed to clear potential red flags in SVB's disproportionate exposure to tech startups, a risky area that can be likened to commercial real estate or emerging markets -- areas that have plagued lenders in the past.
In other words, the administration has failed again. Not able to think several moves ahead of raising interests or of implementing sanctions or trying to take down Russia.
Desert Tortoise
Ironic perhaps that SVBs Chief Risk Officer started her career with a ten year stint at the Federal Reserve Bank of New York followed by positions at AIG, Deloitte, Deutsche Bank, and Fitch Ratings before going to Sumitomo Mitsui Banking Corporation. From SMBC she moved to SVB.
Desert Tortoise
Funny statement. Their bread and butter was the tech industry. This is the same mostly libertarian tech industry that has been screaming for decades for the government to keep their hands off. It was no secret. They were the go to bank for that industry. The same bank lobbied hard to have the Dodd Frank regulations repealed for mid sized banks like theirs. They got their wish.
And on paper the bank's financials looked fine until the Fed started raising interest rates in the face of rising inflation. The bank was slow to realize this then, in the name of transparency, publicly announced they were in the red due to falling bond values that underlie their business. There was nothing criminal involved. Their management was late to recognize a problem then compounded it by being maybe too honest about it. The government did their job shutting the bank down as soon as the run began and have since promised to make depositors whole. The Fed can do this because they caught the problem early and the banks remaining assets still exceed the value of their deposits. Depositors will be paid out of bank assets and the only losers are stock holders and a limited number of unsecured debt holders.
The larger danger is people over reacting. The big US banks that are still more heavily regulated are not in danger of collapse.