Larry Summers warns SVB collapse will have ‘consequences’

Former Treasury Secretary Lawrence Summers has warned that there will be “serious” consequences for the U.S. economy’s restructuring sector if regulators do not act properly in the collapse of the Silicon Valley Bank.

“This will certainly have big consequences for Silicon Valley – and for the economy of the entire venture sector, which is dynamic – unless the government can make sure that this situation is over,” said Summers on Bloomberg Television. Wall Street Week” with David Westin.

Early Friday, regulators stepped in and seized the bank known as SVB after it mounted an unsuccessful attempt to raise capital and saw a cash exodus from tech startups fuel its rise. The lender plowed the tens of billions of dollars it took from venture-capital-backed startups into longer-term bonds, a move that led to big losses.

The Federal Deposit Insurance Corp., designated as the receiver of the SVB, only insures bank deposits of up to $250,000. But a large part of the money deposited in SVB is not insured: more than 93% of domestic deposits as of December 31, according to a regulatory filing.

“There are dozens, if not hundreds, of startups that plan to use that money to meet their payroll next week,” according to Summers, a Harvard University professor and paid contributor to Bloomberg Television. “If that doesn’t happen, the consequences will be very serious for our regeneration system.”

Summers said he hopes regulators will be “aggressive about containing the problem and containing possible contagion.”

“I don’t think this is the time for moral hazard lectures or for talking about teaching people lessons,” he said. “We have enough strains and challenges in the economy without adding the collateral consequences of the collapse of an important sector of the economy.”

The sudden explosion of SVB dealt a deep blow to a sector already reeling from layoffs, declining stock prices and reduced funding for startups. The bank is best known for its funding in the venture capital community but also serves as a financial supermarket for tech executives, providing mortgages on mansions, personal lines of credit and financing for vineyards.

Treasury Secretary Janet Yellen earlier in the day called a meeting of top regulators, after which she issued a statement saying that the US banking system “remains strong“and that regulators “have effective tools” to address developments around Silicon Valley Bank.

For his part, Summers said, “I don’t think it’s a widespread systemic problem.”

The hammering of SVB stock triggered a broader selloff among US lenders, with the KBW Bank Index falling 16% for the week – the worst selloff since the March 2020 Covid shock to the financial system.

Bank Stocks Post Worst Week Since March 2020 as Sector SVB Roils

Summers said it no longer looks like the biggest banks have a distinct mismatch between the type of deposits SVB has and “the ways in which they invest their money in longer-term bonds.”

Earlier on Friday, Summers said that “there may be a need for some consolidation” in the banking sector as a result of the latest development. That could be a test for regulators, he said.

Many Democrats have pushed to limit bank mergers. For example, Senate Banking Committee Chair Sherrod Brown last year called for “ensuring that bank mergers, if approved, serve American families, small businesses, and communities – not Wall Street and large corporations.”

Summers warned that “one of the mistakes that the authorities can make is – due to the fear of consolidation that comes from a kind of populist concern about concentration – blocking combinations that will eventually move in the direction of the -on of finance.”

“That’s something I think we have to be very careful about moving forward,” the former Treasury chief said.

—With assistance from John Gittelsohn

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