Six weeks after the banking crisis that followed the bankruptcy of the Silicon Valley Bank (SVB), the account of the experts has crystallized around four interpretations. The first is that of the incompetent manager. SVB’s senior executives were better at welcoming tech companies with open arms than at making cautious investment decisions. For much of 2022, SVB did not have an experienced risk manager.
Working from home remained the norm for top executives, spread across six time zones from Hawaii to the East Coast. Anyone with experience working from home knows that such arrangements are not conducive to difficult decision-making. Seeing the bank’s deposits skyrocketing, they took the easy route and loaded their portfolio with Treasuries. They did buy hedges against interest rate exposure, but then dumped them to cut costs. At the worst possible time…
The second interpretation is that of the incompetent client. SVB’s corporate clients have placed deposits at the bank that have greatly exceeded the ceiling of 250,000 dollars (228,000 euros) guaranteed by the Bank Deposit Guarantee Fund (FDIC); prudent cash management would have allocated these deposits to banks with stronger balance sheets. Learning that their deposits were uninsured, some SVB customers withdrew their funds in a panic that spread like wildfire through social media.
The third is that of incompetent regulators. SVB CEO Greg Becker was well known to the San Francisco Federal Reserve: he served on its board! The Fed knew that SVB deposits had grown 400% in five years. That should have been like a red flag on a bull. Yet the Fed warned the SVB from 2021 only on ” issues requiring special attention ». Moreover, the Fed’s “stress tests” did not factor in the possibility that inflation and interest rates could rise significantly…
The fourth focuses on misguided macroeconomic policies. A long period of low rates encouraged banks like SVB to accumulate long-term bonds. However, reckless fiscal spending inevitably led to a burst of inflation, necessary to reduce the public debt burden, but forcing the Fed to raise rates, causing bond prices to plummet, which in turn even inflicted losses on the banks.
You have 38.49% of this article left to read. The following is for subscribers only.