Economist Keith Weiner goes into the history behind the implosion of Silicon Valley Bank and why it’s premature for Keynesians to declare victory. As we write this, there seems to be trouble brewing at Credit Suisse. The fact that one of the world’s largest banks is on the ropes should give pause to Canadians who are dismissive of any possibility of a bank run just because Canadian banks are so massive.
The root cause of the collapse of SVB was not stupidity at the bank, insufficient regulation, or corruption at the ratings agencies. The root cause is government interference in money and credit, especially including its irredeemable currency which necessarily inflicts interest rate instability upon the world.
During periods when interest rates are falling, most people love it. Who would dislike endless bull markets and hence capital gains, and rising transaction volumes, and hence profits for investment banks? Economists praise it as a “strong economy.”
The economy was not strong. It was in a false boom, during the Fed’s binge phase. When the Fed went into purge mode, the boom turns to bust (this is starting to happen, but not fully realized yet). In the bust, banks fail, depositors lose their cash, etc. And the pressure grows to bail everyone out, thus leaping back into binge mode and another boom phase.
Regardless of how appealing long-treasuries were for SVB, they had way too many assets tied up in long duration investments – including their tech start-up loan book. Proper risk management would have run multiple interest rate scenarios and tested their portfolio’s hypothetical exposure in those scenarios to ensure their asses were covered. It may have meant sacrificing yield in order to comply but they chase yield. Please stop posting dubious articles about how this wasn’t SVB’s fault.
Agreed I found the article an infomercial for monetary metals…
“Tested hypothetical exposures in those scenarios”.
Unfortunately their head of risk was a DIE Queen and she DID test their exposures, but only to the risk of the woke mob coming at them for incorrect pronoun usage.
RNrn
The board of SVB had only two required credentials: left leaning/Democrat and committed to Wokeness and DEI.
You can’t govern a bank without some basis of economic/business background.
“The root cause of the collapse of SVB was not stupidity at the bank…”
well, there was a $15.1 billion hole on their balance sheet because they were invested in Ginnie Mae, Freddie Mac and Fannie Mae mortgage backed securities, so there was some stupidity involved since there have been warning signs of interest rate hikes coming for well over a year now
Since 2008 if banks do not fill their balance sheets with MBS and Tbills, which are considered zero risk of default, they will incur the wrath of the regulators. If the Fed, in the meantime, decides to invert the yield curve as severely as it has, by what means does a bank hedge against this?
The fed in their forward looking 2022 document on stress tests, did not forecast anything like a 425 basis point raise in rates in 8 months.
Also apparently there was a buyer but that was quashed.
SVB is the George Floyd of bank failures.
Every year something like 12-20 black men die in a police altercation. It’s just a matter of exploiting the right one.
The one that could be used most effectively to advance the narrative and do the most damage.
Which is what I see here.
As others have said, SVB’s failure is on SVB’s management, not deregulation or ‘wokeness’. Further, Credit Suisse has been surprisingly troubled for years now. This is a long time coming.
I’ll add that you can be pretty assured that Canada’s banks aren’t going to go pear-shaped because Canadian banking is more free-market than America’s. No bank branch restrictions for us! No Fannie Mae or Freddie Mac or CRA either.
Further: Canada’s central bank governance is, in the main, much more conservative than America’s. No QE until the pandemic and only mandate (price stability), unlike the US fed’s stupid dual-mandate. The latter being like one of the traps from the Saw franchise except one of the options flat out doesn’t work (the fed has no ability to sustainably influence employment).
This is what really happened:
1 – over the last 2 to 3 years upper management shifted its focus from banking issues to social issues (and the board was AWOL the whole time);
2 – the smarter middle managers gave up. They put in office time but assumed the bank couldn’t fail and stopped trying to get upper management to pay attention;
3 – the investment portfolio became increasingly unbalanced as middle management shrugged. As a result the recent increase in interest rates produced a cash gap as their liabilities became costlier to maintain while asset income remained constant;
4 – about three months ago someone in upper management finally noticed – and tried to raise more equity because that could be leveraged to cover the gap;
5 – their efforts to sell equity drew attention to the dominance of social issues (and diversity hires) in the executive suite. so the equity didn’t sell;
6 – when that failure became public it triggered a run on the bank -much of it electronic and much too fast for the bank to counter.
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So: in reality the bank was solvent and could have been saved easily by having the federal reserve extend a line of credit to cover the rapid withdrawals knowing those would largely come back once the panic ebbed. Unfortunately Dodds- Franks prevented that.. so instead of a cheap and invisible solution we get a financial wipeout and massive new federal banking involvement. Total idiocy all round – and more, I expect, to come.
Question?
How did Dodd Franks prevent a Federal Reserve bailout? I don’t doubt that it did, but is there a simple explanation of the how?
I did read somewhere that they could not come up with a “fair price” for an emergency buyer because the deposits were leaving so fast? $42 billion in one day is about $5 Billion Dollars an hour. I think it was about a quarter of the banks entire assets too? It’s a lot easier to pay out with electrons rather than pallets full of cash.
Barney Frank had a seat on the board.
Wasn’t he responsible for the last big mortgage meltdown?
Barney had a seat on the board of Signature Bank on the East Coast.
That was a DIFFERENT US Top 20 Bank that failed over last weekend.
Isn’t that reassuring news?!
Wasn’t huge Deutche Bank having serious problems about two years ago?
Aren’t a lot of Communist Chinese banks also practically insolvent due to ghost cities and corrupt ponzi scheme construction companies?
Yesterday the Heritage Foundation called SVB “probably the most woke bank in the history of mankind” but let’s not jump to any conclusions. Can we really be sure that communism caused the collapse of the Soviet Union, or that the problem with Hitler was that he was a Nazi? And look at all the woke Warren Buffetts.
I’ve read several analyses about the SVB disaster. While they all seem to differ to one degree or another, the woke/dei connection to the failure was a common thread in all of them.
https://theconservativetreehouse.com/blog/2023/03/16/swiss-central-bank-steps-in-to-backstop-credit-suisse-amid-financial-collapse/#more-244360
Mises and Rothbard predicted all of this, decades ago. In fact, Mises wrote on this nearly a century ago. Fiat money, loose monetary policy and excess government spending ALL created this. The Keynesians should most definitely NOT cheer. Our current situation is the perfect demonstration of Austrian economic theory writ large.