What Did We Learn from Silicon Valley Bank’s Collapse? Something, not much.

In a lecture at  Princeton University’s Markus’ Academy, on March 16, just as the recent banking brouhaha began, former Treasury Secretary Lawrence H. Summers noted that Silicon Valley Bank had been very poorly managed, that its Federal Reserve System supervisors had fallen short in their duties, and that the limits of government deposit insurance needed to be reconsidered.

Summers continued, “If the failure of a bank with 1% of the system’s assets constitutes a systemic event because of the contagion, then we need to rethink the structure of our financial system.”

He summed up:

While there are many important lessons for us today, I would be surprised if students of a US history course in 2035 will have cause to learn about this particular episode, and that’s how we want it to be. The same could not be said about 2008.

Last week Fed Vice Chair for Supervision Michael Barr, a Biden appointee to the Board of Governors, delivered his review of the Fed’s  supervision and regulation of SVT in the years before its failure. The 114-page report had been much anticipated by students of banking regulation. Was there anything in it to undermine Summers’s judgement?

Probably not, judging from Rachel Siegel’s exemplary story in The Washington Post yesterday. Andrew Ackerman and Ben Eisen of The Wall Street Journal did equally well (subscription required). The Board of Governors were briefed by two staffers about SVB’s problem a month before the bank failed, but the seven-member panel failed to act. I follow economics, not the banking industry, but I noticed three or four further stories that could be done.

For instance, keeping an eye on SVB was the responsibility of the Federal Reserve Bank of San Francisco. So, is it the bank’s fault? FRB San Francisco regulatory staffers have an excuse. They live and work in an especially gilded cage.  Silicon Valley entrepreneurs pay close to half the state’s income tax revenue. Who mightn’t be slow to chivy the start-up community’s favorite bank?

Congressman James Comer’s (R-KY) House Oversight Committee plans to hold hearings in mid-May. The Fed’s Inspector General promises a report as well. Better instead to read California Dreamin’, by investigative reporter Mary Williams Walsh, who concludes “Silicon Valley really is like a tent pole holding up the whole state.” (Read the whole thing to see how complicated the situation was.)

Then there is the Federal Deposit Insurance Corp.’s report on its supervision of New York’s former Signature Bank.  Its examiners probably did little wrong.    Signature suffered a run because depositors knew it was favored by crypto currency firms, who had large uninsured deposits. How many? How much? The report doesn’t say. Signature may have been solvent; in which case it could have been saved by a short-term loan from the FDIC. Instead, it was taken over and sold, wiping out its shareholders.  No sympathy for crypto at the Fed, the Treasury Department, or the White House!

Finally, there is little reason to think that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, passed in the wake of the global financial crisis of 2008, solved all problems.  Thus, a bipartisan measure, rolling back some of its strictures on mid-size and small banks, sought to straightened out some of its problems. The measure passed in 2018, on the eve of mid-term elections, creating an opportunity for SVT to grow its deposits from $71 billion to more than $211 billion in the next two years. But then no Act is perfect.

The report’s criticism of a program of easing the rules governing Fed stress-testing engendered the most controversy last week.  Overseen by former Governor Randal Quarles, Barr’s predecessor as Supervision Vice Chair, a Trump appointee, the program was known as “tailoring.” It was endorsed by Fed chair Jerome Powell.

WPost reporter Siegel wrote:

Quarles pushed back strongly against the report Friday evening, saying the exhaustive investigation provided no evidence supporting one of its main conclusions: that shifts in supervisory policies kept the Fed from keeping SVB in check. Quarles pointed to an excerpt in the report that said there was “no policy” that caused changes in supervision. He also criticized a line that suggested staff “felt” changes in what was expected of them. Quarles said that was “on the basis of no communication at all, which is like the ancients asserting they could describe the world by interpreting the flights and cries of birds.”

These stories will be pursued by enterprising reporters and law review authors in the years to come, during the years leading up to 2035, in time to form a judgement about Summers’s opinion. That’s one set of developments for which I don’t mind waiting.  There’s plenty else to worry about between now and then, starting with the unfunded liabilities of the Social Security and national health care systems.  The time-tested political governance system of the United States has plenty of work to do between now and then.

One response to “What Did We Learn from Silicon Valley Bank’s Collapse? Something, not much.”

  1. SVB pulled on a loose string that no one had focused on: uninsured deposits. There are lots of them. Variance by bank regarding the pct of uninsured is public data and the variance is significant, even among small banks.

    But are they really at risk? Not really EXCEPT to fear. And therein lies the rub. I’ll be computing a Gini on deposits once the call reports are released.

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