Silicon Valley Bank remedy undermines regulatory regime
The best rules are rarely made in reactive haste
The US’s solution to the run on Silicon Valley Bank, rushed into over a manic weekend of rule making, is a significant moment in the way the country has governed its banks since the 2008 financial crisis and its remedies. And the outcome may not make the system safer in the long-run.
The SVB crisis culminated in the Federal Reserve, Federal Deposit Insurance Corporation and Treasury Department spending their weekends taking “decisive actions to protect the US economy by strengthening public confidence in our banking system”.
The trio have promised to make all the bank’s depositors whole, to be funded ultimately by a levy on other banks. They also established the Fed's new Bank Term Funding Program, intended to head off the risk of further, similar crises.
Signature Bank, a smaller, New York-based outfit with close ties to the cryptocurrency industry, that also suffered a run on Friday, was given the same treatment.
Before the weekend, the FDIC insured $250,000 of deposits per depositor, per insured bank, for each account ownership category. Anything after that is uninsured and if a bank fails, anything beyond that amount would be lost.
An exception applies to Systemically Important Financial Institutions (SIFIs), which — since the collapse of Lehman Brothers and the financial crisis — US regulators have determined to be too big to fail.
Banks meeting the criteria, laid out in the Dodd-Frank Act of 2010, would be guaranteed a tax-funded bailout if they collapsed, but would in return need to meet additional regulatory requirements and scrutiny — in essence, to ensure they did not.
Several global banks are also counted by the G20's Financial Stability Board as Global Systemically Important Banks (G-SIBs). The list changes annually, but the US banks determined on it are JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Bank of New York Mellon, Morgan Stanley and Wells Fargo.
During his presidency, Donald Trump raised the threshold for what counted as too big to fail in the US, from banks with $50bn of assets to $250bn. This removed certain mid-sized banks from having to comply with stricter regulations, such as regular stress testing.
The next stratum down are the Domestic Systemically Important Banks (D-SIBs), which do not have enough reserves to be a SIFI but are considered a potential risk to the US financial system. Regulators can impose enhanced prudential standards on banks meeting these criteria, similar to those for SIFIs.
SVB was neither. On Friday, the FDIC said it had about $209bn of assets and $175.4bn of deposits, which meant it did not qualify for Fed support.
Yet on Sunday, the trio stepped in to secure SVB’s deposits to halt the disastrous effects the bank run would have on the Californian tech sector, which constituted the bulk of its clients, and possible contagion to the US banking system.
In one move the Fed, FDIC and Treasury undermined the regulatory regimes of the previous two presidents — and one of Signature Bank’s board members, one Barney Frank. They have lowered the threshold for intervention below Trump’s revised level, while undermining what counts as too big to fail.
If SVB and Signature Bank, or perhaps more accurately their depositors, can be bailed out to this extent, what is to stop banks of similar sizes from taking bigger risks from now on?
Much has been made on Monday of SVB’s singular decision to, apparently, not hedge the interest rate risk on its bond holdings through the swap market. No doubt the inner workings of SVB’s balance sheet and treasury operations will be picked over in great detail in the months and years to come.
But if a similarly sized bank ends up collapsing and its depositors are wiped out, there are going to be a lot of questions about what made SVB’s customers so deserving. We must not forget, after all, that much of these deposits were funding SVB’s customers had received to run their businesses until they became profitable. In short, the US has just bailed out a number of loss-making private businesses of questionable value to the economy.
Perhaps if just one of them goes on to become the Great American Tik-Tok, it will generate enough tax payments to pay many times over for the US’s regulatory largesse this weekend. We will have to wait and see.
Meanwhile, the move to support the US banking system and prevent an all-out capitulation because of one or two collapses is a valid one. But doing so while undermining the very system imposed to prevent banks from taking on too much risk is dangerous.
The Fed is playing with fire, and as the last few years have shown, those spread quickly in California.