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EDITORIAL: A banking crisis? No, but a prescient warning

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The recent failure of Silicon Valley Bank (SVB) in California and Signature Bank in New York sent shockwaves through the global financial services industry and stock markets.

The S&P 500 briefly fell into negative territory for the year, the S&P exchange-traded fund for regional banks shaved more than 12% of its value and even national banking giants like JPMorgan Chase, Bank of America and Citigroup all saw stock value losses in the wake of the closures.

Just three business days after the Federal Reserve took over SVB, the crisis had swept the globe. Jittery investors and depositors in Europe pulled out of long-embattled giant Credit Suisse, as its largest investor, the Saudi National Bank, said it could not provide any more funding.

Jacob Owens
Delaware Business Times

Even far-off corners of the world were not immune, as Vietnam’s central bank slashed interest rates overnight to bolster its economy against potential concerns.

Yet for all that hand-wringing and volatility in our financial markets, is this a situation poised to become the next “Great Recession?”

It doesn’t appear so, but it should be a wake-up call.

When Lehman Brothers and Bear Stearns of “too big to fail” fame did just that in 2008, it was largely due to poor risk management amid a dangerously deregulated housing and securities market. Some of the biggest investment funds in the country were making risky bets on mortgagors who likely wouldn’t be able to pay.

The losses of such giants rippled far and wide through the banking ecosystem, and countless more banks had exposure to the housing bubble even if they weren’t fatal.

In today’s case of SVB and Signature, the banks once again undoubtedly made poor risk management choices.

The California bank had grown tremendously on the bullish nature of Silicon Valley’s innovation ecosystem and had become a preferred bank and lender to many startups, including major companies today like Roku and Roblox. For all of its marketing success, however, SVB wasn’t planning for unforeseen issues.

It invested too heavily in long-term government bonds, reportedly placing 75% of its debt in bonds that wouldn’t mature for 10 or 30 years when other banks its size invested about 6%, according to the New York Times. When venture capital slowed amid concerns for a recession in the past year, clients had to draw more heavily on deposits, leaving the bank short on liquidity.

SVB was forced to sell more than $20 billion in bonds at a loss and seek investor funding to help it survive. It didn’t arrive in time, as news of its bond loss started a run on deposits and steep losses in its stock.

The failure of SVB reportedly caused a similar run on deposits at New York-based Signature, as nearly 90% of accounts exceeded the $250,000 threshold insured by the Federal Deposit Insurance Corp. Signature was also well-known for being one of the few banks to accept cryptocurrency deposits, which added to its demise as their falling value weakened their deposit value and likely added to depositors’ concern.

In many ways, the recent crisis looks much more like the demise of Savings & Loans in the 1980s than it does the Great Recession, as S&Ls’ also made poor long-term bets. Likewise, SVB failed from poor management coupled with a classic “It’s A Wonderful Life” bank run, where panic breeds a rapid deposit loss.

The failures won’t leave startups or investors scrambling to resolve losses, though. The federal government ended up bailing out depositors at both banks, insuring all funds at SVB and Signature regardless of the well-known FDIC thresholds.

There is much to debate over whether the Biden administration should have done so and whether the decision to cover all losses will only continue to convince banks to make risky choices.  

But the situation at SVB and Signature is not indicative of wider dysfunction in our financial markets, especially for typical consumers here in Delaware. Nearly all of Delaware’s major consumer banks are regional or national companies with well-diversified portfolios that can help cover deposit runs or investment losses.

The SVB case is a wake-up call for Washington regulators though.

More than four years ago, the Trump administration approved a reduction in federal regulations regarding risk management oversight from banks with at least $50 billion in assets to those with at least $250 billion. Coincidentally, the leaders of SVB and Signature lobbied for the change that would lessen the burden on mid-sized banks.

The $50 billion threshold was part of the Dodd-Frank Act passed in the wake of the Great Recession to protect against future crises, but a push for deregulation likely delayed the time that SVB had to respond to its debt imbalance. Even former Goldman Sachs CEO Lloyd Blankfein, who was part of the Great Recession bailout talks, agreed this month that the threshold should be reassessed. Sen. Elizabeth Warren and Rep. Katie Porter are preparing to introduce a bill to restore the original threshold.

Nearly five years ago, Delaware’s federal delegation of Sens. Tom Carper and Chris Coons, and Rep. Lisa Blunt Rochester, were only among a handful of Democrats in supporting the Republican rollback of the Dodd-Frank regulations. At the time, the senators said the bill wasn’t perfect, but was “a step in the right direction for both consumers and community banks and credit unions.”

Considering the failures of SVB and Signature, and that only M&T Bank would notably fall under the lower threshold among major Delaware consumer banks, I think it’s appropriate to reconsider that stance to support the confidence of depositors nationwide.

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