McManus: Silicon Valley Bank collapse may be a blessing Liberal-Liberal-news

In the brief but spectacular collapse of Silicon Valley Bank, we may have witnessed the best banking crisis in history.

It might even have been useful.

No one was seriously hurt, except for bank executives who made bad decisions and shareholders who didn’t pay attention.

Those Silicon Valley libertarians who spent years demanding that the government get out of the way got their comeuppance when they begged the Federal Reserve to bail them out. “Where is [Federal Reserve Chair Jerome H.] Powell? where is [Treasury Secretary Janet L.] Yellen? Stop this crisis NOW.” tweeted David Sacks, the tech investor who was a fan of creative destruction until he got too close to his bank account.

Just as there are no atheists in the trenches, there are no libertarians in a financial panic.

Republican politicians provided a dose of comedy, blaming SVB’s financial missteps on the imagined threat of “wake up banking.” There is no evidence that the bankers’ political leanings, “awakened” or otherwise, affected their balance sheet.

The rest of us get a helpful reminder of why free-market capitalism needs to be regulated: to protect the small (and sometimes the not-so-small) from catastrophe.

Most importantly, the Federal Reserve and the Federal Deposit Insurance Corporation. (FDIC) received a wake-up call that its oversight of midsize banks has been dangerously lax.

The SVB collapse, frightening as it was, could be a useful corrective to excessive bank deregulation, like a brief health crisis prompting people to exercise more and eat better.

Despite the daunting complexities of high finance, the story of SVB turned out to be quite simple. The bank parked too much of its cash in long-term government bonds, the value of which fell when interest rates rose. That left SVB without enough assets if a group of its depositors decided to withdraw their money all at once, which they did.

But SVB’s vulnerability shouldn’t have been a surprise. The bank reported its problems in public financial statements last fall. The Wall Street Journal published an article on the asset crunch in November, almost four months before the tech panic.

The mystery is why neither SVB’s chief executive, Greg Becker, nor the federal and state authorities assigned to regulate the bank acted to prevent the crisis. The Federal Reserve or the California Department of Financial Innovation and Protection could have required SVB to raise more capital last year, when it was less vulnerable. they didn’t

“Regulators were asleep at the switch,” Lawrence J. White, a banking expert at New York University’s Stern School of Business, told my colleague Don Lee.

When SVB’s big depositors began their stampede earlier this month, it was too late.

For Powell and Yellen, the panic in Palo Alto raised the specter of runs on other midsize banks across the country.

So they stepped in, took over SVB and said they would guarantee all accounts, even those larger than the FDIC insurance ceiling of $250,000.

That qualifies as a ransom. It will be paid for in fees at the banks instead of tax dollars, but each bank customer will share the invisible cost.

Still, it was better than the alternative: more bank runs and more damage to the economy.

The decision to cover uninsured deposits of more than $250,000 raised concerns about “moral hazard.” In theory, capitalism regulates itself when risky behavior is punished, for example, putting too much money in a bank. If the government bails out people who make bad bets, they have no incentive to avoid undue risk.

But the rescue of SVB was not without precedent. The FDIC and Fed have quietly bailed out most uninsured depositors since 2008.

Becker wants a chance to explain himself in congressional hearings, the Capitol Hill version of the Walk of Shame on “Game of Thrones.” Presumably, he will be asked if he really was too awake to realize that his long-term bonds were losing value.

Regulators will also be called to account, not just by longtime critics like Sen. Elizabeth Warren (D-Massachusetts). Last week, a dozen senators, including Kyrsten Sinema (I-Ariz.) and JD Vance (R-Ohio), asked the Fed why it didn’t investigate SVB.

There is already a list of possible solutions. Congress could reimpose so-called stress tests on midsize banks, a rule it removed in 2018. The Fed could reimpose liquidity requirements for those banks, a rule Powell relaxed in 2019. cost.

The test will come in six months: Is the Fed doing more? are the banks? And are voters still paying attention?

The nerves of the banking system have not ended. The government is still trying to sell what is left of SVB. San Francisco-based First Republic Bank still looks shaky, even after a $30bn injection of deposits.

But at least for a moment, the rest of us can breathe a sigh of relief. If all financial crises could be resolved as quickly as this one, capitalism would be a little less scary.

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