On Monday, the head of the Federal Deposit Insurance Corp. warned a gathering of bankers in Washington about a $620 billion danger lurking in the US financial system.
By Friday, two banks had lost it.
Whether US regulators saw the dangers early and took sufficient action before this week’s collapse of Silvergate Capital Corp. SVB Financial Group is now being prepared for a national debate.
The sudden demise of SVB – the biggest in more than a decade – has left legions of Silicon Valley entrepreneurs in turmoil and turmoil. In Washington, politicians are taking sides, with Biden administration officials declaring “full confidence” by regulators, even as some watchdogs race to review blueprints for handling past crises.
To his credit, FDIC Chair Martin Gruenberg’s speech this week wasn’t the first time he expressed concern that banks’ balance sheets are loaded with low-interest loans that have lost hundreds of billions of dollars in value between of the Federal Reserve’s rapid rate hikes. That raises the risk that a bank will fail if withdrawals force it to sell assets and realize losses.
But despite his concern, the collapse of two California lenders in the middle of a work week marks a stark contrast to the years following the 2008 financial crisis, when regulators including the FDIC smoothly took over hundreds of failed banks, often surrounding their headquarters. after the close of US trading on Friday.
Even in the darkest moments of that time, the authorities were able to intervene in Bear Stearns Cos. and Lehman Brothers Holdings Inc. while the markets are closed for the weekend.
‘Blind Spot’
In this case, the watchdogs left the cryptocurrency-friendly Silvergate for another week of work after warning on March 1 that the increase in losses could harm its viability. The bank finally said on Wednesday that it would close.
On the same day, the SVB signaled the need to strengthen its balance sheet, fueling fears of a wider crisis. A deposit run and bank foreclosures ensued. The KBW Bank Index of 24 major lenders suffered its worst week in three years, falling 16%.
“With Silvergate there was a little regulatory blind spot,” said Keith Noreika, who served as acting comptroller of the currency in 2017. “Because they cut it in the middle of the week, everyone was scared, thinking it was going to happen. which happens to others with similar funding mismatches.”
Representatives of the FDIC and Fed declined to comment.
The drama has already fueled arguments in Washington about the Dodd-Frank regulatory overhaul implemented after the 2008 crisis — as well as its partial rollback under President Donald Trump.
Trump eased oversight of small and regional lenders when he signed a far-reaching measure designed to lower their costs of complying with regulations. A May 2018 measure raised the threshold for being considered systemically important — a label that imposes requirements including annual stress testing — to $250 billion in assets, up from $50 billion.
SVB had just raised $50 billion at the time. By early 2022, it had risen to $220 billion, eventually ranking as the 16th largest bank in the US.
In 2015, SVB Chief Executive Officer Greg Becker urged the government to increase the threshold, arguing otherwise it would lead to higher costs for customers and “restricting our ability to provide credit to our clients.” With a core business of traditional banking – taking deposits and lending to growing companies – SVB does not pose systemic risk, he said.
Rapid Growth
Democratic Senator Elizabeth Warren of Massachusetts, where SVB has branches, said the easier rules played a role in SVB’s downfall. “The decision by President Trump and congressional Republicans to roll back Dodd-Frank’s ‘too big to fail’ rules for banks like SVB — reducing management and capital requirements — has contributed to a costly collapse,” he said in a statement.
The lender achieved much of its meteoric growth by mopping up deposits from red-hot tech startups during the pandemic and plowing money into debt securities in what became last part rates at rock bottom.
As businesses later burned through funding and drained their accounts, SVB took a $1.8 billion tax loss after the first quarter, causing panic.
‘Real Stress Test’
“This is a real stress test for Dodd-Frank,” said Betsy Duke, a former Fed governor who later headed Wells Fargo & Co.’s board. “How will the FDIC resolve the bank under the Dodd-Frank requirements? Investors and depositors will watch everything they do carefully and assess their own risk of losing access their funds.
One thing that helps: SVB is required to have a “living will,” which offers regulators a roadmap for winding down operations.
“The confidential resolution plan will define the potential buyers for the bank, the components of the franchise, the parts of the bank that are important to continue,” said Alexandra Barrage, a former senior FDIC official now in the law. firm Davis Wright Tremaine. “Hopefully the resolution plan will help the FDIC.”
The issues raising Silvergate and SVB, including their unusual concentration of deposits from certain types of clients, were “a perfect storm,” he said. That may limit how many other companies face the problem.
A complication is that the governor has little room to help banks with liquidity, because it is in the middle of trying to absorb money from the financial system to fight inflation.
Another is that a generation of bankers and regulators at the helm did not manage the last period of high interest rate hikes, which raises the possibility that they will not anticipate improvements as quickly as their predecessors.
In fact, even bank failures were rare at one time. SVB is the first since 2020.
“We’ve seen the effects of decades of cheap money. Now we have rapidly rising rates,” Noreika said. “Banks don’t have to worry about that for a long time.”
–With help from Jenny Surane.
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