Schrödinger’s Bank

Is it possible for a bank to be systemically important and not systemically important simultaneously? Apparently so, at least if the bank is Silicon Valley Bank. From Vivek Ramaswamy’s op-ed in the Wall Street Journal:

Treasury Secretary Janet Yellen announced Sunday evening that Silicon Valley Bank’s uninsured depositors would gain access to their deposits on Monday. The Federal Deposit Insurance Corp. insures only deposits up to $250,000. The bailout creates incentives for risky behavior, teaching large depositors that they can throw money at risky banks without diversifying or conducting diligence. SVB long lobbied for looser risk limits by arguing that its failure wouldn’t create systemic risk and thus didn’t merit special intervention by the U.S. government. Yet on Sunday, Treasury deemed SVB “systemically important.”

To the extent that failing to make SVB’s uninsured depositors whole would have heightened the risk of a run on other banks, the Federal Reserve should have played its role as lender of last resort. Another option would have been to increase the FDIC coverage limit to a level that would avert a run, shoring up public confidence in other U.S. banks without showing favoritism toward SVB.

Here’s an interesting little tidbit I hadn’t seen elsewhere (the emphasis is mine):

SVB’s situation is different from that of most U.S. banks. Only 11% of its deposits were insured. While the operating accounts of small businesses often exceed the FDIC limit, large banks usually sweep the excess into cash-management programs that buy Treasury bills and other securities. As the nation’s 16th-largest bank, SVB simply chose not to do so. For some reason Roku, the publicly traded maker of streaming devices, had a $487 million balance with the bank.

Here’s another:

SVB also had a concentrated client base of tech startups whose needs for capital were highly sensitive to rising interest rates. Yet SVB itself had the highest concentration of any major bank in mortgage-backed securities, also especially sensitive to that risk factor. This is an egregious oversight specific to SVB. Its investment portfolio was 57% of total assets, more than twice its peer average of 24%.

He complains about SVB’s political contributions:

Either SVB was incompetent or this is a case of moral hazard, taking excessive risk and expecting political favors and bailouts. It turns ot SVB’s real “hedge” was to curry favor with the Biden administration. In 2022 SVB publicly committed $5 billion in “sustainable finance and carbon neutral operations to support a healthier planet.” SVB’s 2022 ESG report lists a litany of “cross-function working groups,” including a “Sustainable Finance Group” that monitors progress against SVB’s Climate Commitment and an “Operational Climate Group” that “monitors implementation of operational greenhouse gas reduction initiatives.” Rather than apply basic risk-management practices, SVB resorted to lobbying for looser risk limits. Taxpayers shouldn’t vindicate SVB’s political hubris.

That’s not quite balanced. According to Open Secrets SVB bankers were equal opportunity favor curriers, donating both to Democrats and Republicans. That’s the way the game is played.

He concludes:

Silicon Valley entrepreneurs want to move fast and break things, but we shouldn’t let them break public trust as a long-shot maneuver for a special bailout. That isn’t how capitalism works.

I would add that SVB’s CEO selling stock days before the bank was closed and paying out bonuses just hours before the bank was closed smells to high heaven.

I’m not the right person to ask about what should be done. I thought that the banking crisis in 2007-2008 was mishandled and said so at the time.