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A Few Takeaways From The Failure of Silicon Valley Bank (…And Signature Bank)
…No expert analysis…only simple observations…
The article was originally published in “The Musings Of A Politics Junkie & Closet Economist.” To read more, please visit the website.
This is not a political rant nor an analysis of what happened at SVB…The Fed can comment on this case with higher sophistication and more information. That said, there are a few takeaways that should not be understated.
Defining a bailout can be a nuanced exercise…
I found the following definition for “bailout” in the dictionary: “a rescue from financial distress.”
Thus, maybe the following is correct: “The government funded a bailout for the SVB and Signature Bank.”
The government provided funds to cover depositors far and above the amount insured by the Federal Deposit Insurance Corporation (FDIC) — more than 90% of the deposits at SVB were uninsured. The government may not have to provide the full amount if it can find a buyer for SVB’s US assets (similar to purchase of SVB’s UK unit by HSBC for £1 in a rescue deal facilitated by the administration of Rishi Sunak).
Until then, this looks like a bailout…and, with a buyer, it still looks like a bailout. Political pundits, journalists and afficionados love this debate on whether President Biden has backed a financial bailout…everybody else sees money coming from a government entity to a failing bank a.k.a. a bailout. Better question for the debate: how does this change the risk-reward perception of investors and depositors? Critics are correct to ask whether the public now increasingly assumes the U.S. government (that continues to borrow incessantly at higher and higher levels) can continue to provide bailouts at any cost.
Saying there is no contagion risk does not mean there is no contagion risk…
Government officials initially trusted the strength of the banking system on a Friday when SVB was collapsing…then they quickly became unsure and, by the end of a weekend, were prepared to announce a bailout for SVB and Signature Bank. It should have raised eyebrows when deputy Treasury secretary, Wally Adeyemo, was the first person speaking to the public…President Biden and Treasury Secretary Janet Yellen were likely not going to speak until there was some certainty on the situation. That is not a critique of Mr. Adeyemo…it is a critique of the entire situation. The government knew there was the potential of contagion risk but could not acknowledge such risk on day 1. The political debate on whether there is a bailout, however, begs the question on whether the Biden administration could have gone full “bailout” mode if it initially made the case for there being contagion risk when the SVB news was breaking.
This was a digital bank run…
The significant amount of customer withdrawals that led to the collapse were arguably fueled by prominent venture capitalists raising the alarm via their online platforms. The situation at SVB has all the makings of a digital bank run. A few tweets go out. Then investors advise startups to reconsider where they hold their cash with founders and CEOs then messaging on private Slack channels and exchanging confidential emails internally (and to investors externally) on precautionary steps to take (including movement of money out of SVB generally initiated by online transfers to another bank). The messaging within these private networks and the greater VC community effectively created a mass hysteria, which (unfairly) in due time may be partially blamed for the bank failure (versus the obvious other problems) and the greater contagion risk. We are clearly in the digital age and the time for leaders to respond to crises is limited by the time it takes for news to spread and a narrative to be created. That does not infer that blame should shift to online platforms such as Twitter.
Bank oversight is a function of the people doing the oversight…
Given the significant and rapid increases in interest rates by the Federal Reserve, financial risk in the system was going to increase. But this case is not simply a function of rates. Bloomberg reported that the SVB’s asset-liability committee received an internal recommendation in 2020 to buy shorter term bonds as more deposits piled into the bank. The recommendation likely came for two reasons: (i) most of the bank’s money was demand deposits from tech startups that burn cash quickly, often require quick access to their cash at the bank, and would quickly withdraw money at the sign of any trouble; and (ii) the long term debt holdings assume rates will stay low (which Federal Reserve chair Jeremy Powell vocally warned the world in the last year was not the case) and, if rates do not stay low, then those long term debt instruments with low rates do not look as valuable in today’s market if you need to make a quick sale (which is what SVB had to do at a loss of $1.8 billion on $21 billion of debt). The oversight feels abysmal simply for this poor management of the bank’s balance sheet. To be fair, the rate hikes, which are the most significant increases since former Federal Reserve chair Paul Volcker raised rates 40 years ago, have dramatically altered the financial landscape in a very short period and is forcing many banks and companies to respond quickly to massively different debt market…but again, Mr. Powell and his colleagues have been transparent in their thinking on rate hikes. Today, however with the risk in the system, it is not clear what the Fed may be thinking but I trust Mr. Powell will let us know shortly.
Blaming “Woke-ism” is a political strategy (but not an explanation of the problem)…
Trying not to appear political when giving a view here is hard. The mismanagement of the balance sheet was an issue. The lack of a Chief Risk Officer during much of last year was probably part of the problem (the Fed will provide its report after an investigation). But “woke-ism” as the explanation for what happened at SVB appears inadequate. If bailouts are an issue, then critics can make the case (and likely will have significant political and public support). I also assume putting this at the hands of poor management may also be a good way to sidestep more aggressive banking regulation (if that is your position) and again there may be significant political and public support. Hopefully I avoided the political cross-firing and hid my political views because we can all agree that everyone is equally frustrated with this situation (regardless of the politics).
The article was originally published in “The Musings Of A Politics Junkie & Closet Economist.” To read more, please visit the website.
