On Monday, the head of the Federal Deposit Insurance Corp. warned a gathering of bankers in Washington about the $620 billion risk inherent in the US financial system.
By Friday, two banks had surrendered.
Did US regulators see the dangers of brewing early enough and take sufficient action before this week’s collapse of Silvergate Capital Corp. and the larger SVB Financial Group is now teed up for a national debate.
The sudden death of SVB – the biggest in more than a decade – has left many Silicon Valley entrepreneurs in confusion and livid. In Washington, politicians are taking sides, with Biden administration officials expressing “full confidence” in regulators, even as some watchdogs race to review the blueprint for handling past crises.
To his credit, FDIC Chairman Martin Gruenberg’s speech this week is not the first time he has expressed concern that banks’ balance sheets are loaded with low-interest bonds that have lost hundreds of billions of dollars in value amid the Federal Reserve’s rate hikes. This increases the risk that the bank could fail if the withdrawal forces it to sell the asset and incur a loss.
But despite the concern, the collapse of two Californian lenders in the middle of the work week provides a stark contrast to the years following the 2008 financial crisis, when regulators including the FDIC neatly seized hundreds of failing banks, usually running them to headquarters. after US trading closes on Friday.
Even in the darkest moments of the era, authorities managed to intervene in Bear Stearns Cos. and Lehman Brothers Holdings Inc. when the market is closed on weekends.
‘Blind Spot’
In this case, the watchdog allowed cryptocurrency-friendly Silvergate to limp into another working week after warning on March 1 that mounting losses could damage its viability. The bank finally said on Wednesday it would close.
On the same day, SVB signaled the need to balance its balance sheet, fueling fears of a wider crisis. A deposit opening and bank seizure followed. The KBW Bank index of 24 large lenders had its worst week in three years, down 16%.
“With Silvergate there are some regulatory blind spots,” said Keith Noreika, who became the currency’s watchdog in 2017.
Representatives for the FDIC and the Fed declined to comment.
The drama has fueled controversy in Washington over the Dodd-Frank regulatory overhaul enacted after the 2008 crisis — as well as a partial rollback under President Donald Trump.
Trump is easing oversight of small and regional lenders as he signs measures designed to reduce the cost of complying with regulations. A measure in May 2018 raised the threshold for being considered systemically important – the requirements that apply the label include annual stress tests – to $250 billion in assets, from $50 billion.
SVB has only crested $50 billion at the time. By early 2022, it had grown to $220 billion, eventually making it the 16th largest US bank.
In 2015, SVB Chief Executive Officer Greg Becker urged the government to increase the threshold, arguing it would lead to higher costs for customers and “stifle our ability to provide credit to our clients.” With the core business of traditional banking – taking deposits and loans for many companies – SVB does not pose a systemic risk, he said.
Fast growth
Democratic Senator Elizabeth Warren from Massachusetts, where SVB has a branch, said that easier rules played a role in SVB’s downfall. “President Trump and the Republican congress ‘decision to roll back Dodd-Frank which is too big to fail’ rules for banks like SVB – reducing both supervision and capital requirements – contributed to the collapse of the price,” he said in a statement.
Lenders have gotten much of their meteoric growth by taking deposits from hot tech startups during the pandemic and plowing the money into debt securities that are the final price.
When the venture then burned through funding and reduced accounts, SVB posted an after-tax loss of $1.8 billion for 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 chaired the board of Wells Fargo & Co. “How will the FDIC resolve the banks according to the requirements of Dodd-Frank? Investors and savers will carefully monitor everything they do and evaluate their own risk of losing access to funds.
One thing that can help: SVB is required to have a “life will,” offering map regulators to wind down the operation.
“The confidential resolution plan will describe the potential buyer for the bank, the franchise component, the part of the bank that is important to continue,” said Alexandra Barrage, a former senior FDIC official now at the law firm Davis Wright Tremaine. “We hope the resolution plan will help the FDIC.”
The problems that upended both Silvergate and SVB, including the unusual concentration of deposits from certain types of clients, were “a perfect storm,” she said. That can limit many other companies that face problems.
One complication is that the Fed has no room to help banks with liquidity, as it is in the midst of trying to siphon money from the financial system to fight inflation.
Another is a generation of bankers and regulators who were at the helm of irresponsibility during a period of drastic interest rate hikes, raising the prospect that they will not anticipate as easily as their predecessors.
Indeed, even bank failure has been rare for the time being. SVB is the first since 2020.
“We are seeing the effects of decades of cheap money. Now we have rapidly rising rates,” Noreika said. “Banks haven’t worried about this for a long time.”
-With help from Jenny Surane.
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