On Monday, the head of the Federal Deposit Insurance Corp. a gathering of Washington bankers for a $620 billion risk lurking in the US financial system.
By Friday, two banks had already succumbed to it.
Whether US regulators saw the dangers early enough and took enough action before the collapse of Silvergate Capital Corp. and the much larger SVB Financial Group this week, is now engaged in a national debate.
SVB’s abrupt demise — the largest in more than a decade — has left legions of Silicon Valley entrepreneurs in a frenzy. In Washington, politicians are drawing sides, with Biden administration officials voicing “full confidence” in regulators, even as some watchdogs rush to review blueprints for dealing with past crises.
To his credit, FDIC Chairman Martin Gruenberg’s speech this week wasn’t the first time he expressed concern that banks’ balance sheets were cluttered with low-yield bonds that had lost hundreds of billions of dollars in value amid the the Federal Reserve’s rapid rate hikes. That increases the risk of a bank failing if withdrawals force it to sell those assets and realize losses.
But despite his concerns, the toppling of two California lenders in a single workweek was a stark contrast to the years following the 2008 financial crisis, when regulators, including the FDIC, neatly seized hundreds of failing banks, usually returning to their homes just in time. headquarters rolled. after US trading closed on Friday.
Even in the darkest moments of the time, authorities managed to intervene at Bear Stearns Cos and Lehman Brothers Holdings Inc. while the markets were closed for the weekend.
In this case, watchdogs allowed cryptocurrency-friendly Silvergate to walk into another working week after it warned on March 1 that mounting losses could undermine its viability. The bank finally said Wednesday it would close.
That same day, SVB indicated that it needed to strengthen its balance sheet, fueling fears of a broader crisis. A deposit run and the bank seized followed. The KBW Bank Index of 24 major lenders had its worst week in three years, falling 16%.
“With Silvergate, there was a bit of a regulatory blind spot,” said Keith Noreika, who served as acting comptroller of the currency in 2017. happen to others with similar funding mismatches.”
Representatives from the FDIC and Fed declined to comment.
Trump eased oversight on small and regional lenders when he signed a far-reaching measure to lower their regulatory compliance costs. A measure in May 2018 raised the threshold for being considered systemically important — a label that imposes requirements including annual stress testing — to $250 billion in assets, up from $50 billion.
SVB had just hit $50 billion at the time. By early 2022, it grew to $220 billion, eventually becoming the 16th largest U.S. bank.
The lender achieved much of that rapid growth by clearing deposits from red-hot tech startups during the pandemic and putting the money into debt securities at what turned out to be the last stretch of the bottom rate.
As those companies later burned through funding and drained their accounts, SVB posted a $1.8 billion after-tax loss for the first quarter, sparking panic.
‘Real stress test’
“This is a real stress test for Dodd-Frank,” said Betsy Duke, a former Fed governor who later served as chairman of the board of Wells Fargo & Co. “How will the FDIC resolve the bank under Dodd-Frank requirements? Investors and depositors will carefully monitor everything they do and assess their own risk of losing access to their funds.”
One thing might help: the SVB needed to have a “living will,” giving regulators a card for winding down operations.
“The confidential resolution plan is going to describe the potential buyers for the bank, the franchise components, the parts of the bank that are important to continue,” said Alexandra Barrage, a former senior FDIC official who now works at the law firm Davis Wright Tremaine. “Hopefully that resolution plan will help the FDIC.”
The issues that rocked both Silvergate and SVB, including their unusual concentration of deposits from certain types of customers, were “a perfect storm,” she said. That can limit how many other companies get into trouble.
A complication is that the Fed has less room to help banks with liquidity as it is busy sucking money out of the financial system to fight inflation.
Another is that a generation of bankers and regulators at the helm was not in charge during the last period of sharp interest rate hikes, raising the prospect that they will not anticipate developments as easily as their predecessors.
In fact, even bank failures have been rare for a while. SVB’s was 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 had to worry about that for a long time.”
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