March 15, 2023
Good morning. Just as jitters about smaller banks were ebbing away, the condition of Credit Suisse seems to be causing consternation.
Today's newsletter is 1,182 words, 4.5 minutes.
1 big thing: The Fed and the SVB meltdown
The Federal Reserve doesn't just set monetary policy. It's also the primary regulator for many banks — including the failed Silicon Valley Bank. Now, progressives and the banking industry — unlikely bedfellows to be sure — are blaming the Fed for that bank's epic collapse, Emily writes.
Why it matters: With SVB's failure, one big question is, was it the laws on the books that failed, or a lapse in their enforcement? The answer, in theory, helps prevent the next crisis.
- We know the proximate cause of SVB's collapse — a record-breaking $42 billion bank run fueled by its highly concentrated depositor base of venture capitalists and startup founders. And we know that losses in the bank’s holdings of long-duration bonds, triggered by rapidly rising interest rates, caused the immediate cash crunch.
- So why didn't the bank’s regional supervisors or bank examiners at the San Francisco Fed catch these risk management issues before they ballooned into crisis?
What they're saying: One of the Federal Reserve's main jobs is overseeing banks — and they failed here, says Aaron Klein, a senior fellow at Brookings.
- His comments aren't dissimilar to those of the Bank Policy Institute, an industry advocacy group. "The failure of SVB appears to reflect primarily a failure of management and supervision," the group said.
- The San Francisco Fed was the bank's supervising regulator. They should have looked at SVB's books and identified the risks, says Saule Omarova, a law professor at Cornell, whose nomination to lead the Office of the Comptroller of the Currency fell through in 2021.
- The risks were publicly reported, too, says Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for tighter regulation, pointing to a November 2022 WSJ article highlighting risks to banks from rising interest rates that named SVB.
The other side: Bank examiner dealings are confidential, so we don't know what was happening behind the scenes.
- Examiners might not have realized the level of risk at play. Previous to this crisis, uninsured bank deposits were viewed as only marginally riskier than accounts covered by the Federal Deposit Insurance Corporation. No one had ever seen a bank run go viral on Twitter.
Meanwhile, until the end of 2021, the vice chair for supervision at the Federal Reserve, responsible for setting the agenda around supervision, was President Trump's appointee Randal Quarles. He’s been criticized for urging bank examiners to take a less adversarial approach.
- Quarles tells Axios that the assessment simply isn’t accurate. "It wasn't friendlier supervision," he says. "It was due process." The idea was to be fair.
- Quarles also pushed through regulatory changes that eased certain standards. He says those moves wouldn't have changed the outcome for SVB.
- Separately, SVB's former CEO until last week sat on the board of the San Francisco Fed, one of three executives representing banks in the district.
But, but, but: While it's easy to point the finger at regulators, Omarova and Kelleher both say the bank's failure is ultimately the fault of its own leaders.
What we're watching: The Federal Reserve said on Monday that it's conducting a review of how its supervision of the bank was handled.
2. The Dodd-Frank rollback
The Fed isn't the only place to point the finger. Some critics, like Sen. Elizabeth Warren (D-Mass.), also cite the Trump-era rollback of certain portions of Dodd-Frank rules, Emily writes.
Details: That rollback, passed with a bipartisan vote, raised the bar on which banks would be categorized as systemically important. Previously, banks with $50 billion or more in assets qualified; now it's $250 billion.
- That meant SVB (which had assets of $209 billion at the end of last year) and banks like it were no longer subject to stringent stress tests and liquidity requirements — which are meant to ensure banks have at least 30 days of cash or cash-equivalents on hand to pay back depositors in case there's some kind of shock.
- However, it's not clear if those requirements would have made any difference for SVB. The Bank Policy Institute says SVB would've passed these tests.
The bottom line: Omarova and Klein both pointed out that the law on the books and how it's implemented are two very different things.
3. Catch up quick
4. Parallels to the 1980s
Most of the finance world is looking to the great financial crisis for parallels to what happened to Silicon Valley Bank, but perhaps a better case study lies back in a time before bank runs went viral on Twitter. Before the internet. When roller rinks, "Flashdance," and big hair were in the air — and people talked on the phone.
- We're talking about the 1980s, Emily writes.
What happened: The savings and loan crisis. From 1980 to 1994, nearly 1,300 of these smaller, home loan-focused banks failed.
- And they failed partly because of at least one issue that plagues us today: high inflation that prompted big rate increases by the Fed.
- The S&Ls were in the mortgage business, and when they made these loans they held them on their books. As rates rose, those mortgages were worth less and less — a sort of corollary to the mortgage-backed and government securities sitting on SVB's books.
Yes, but: There are differences in the details, of course. Back then, banks were competing for deposits with money market funds that paid higher rates — and they were losing. That wasn't quite the issue with SVB.
- We've also only seen two banks fail. Not hundreds.
The bottom line: As the kids like to say, history doesn't repeat, but it does rhyme.
5. Wealth evaporated
The value of SVB Financial CEO Greg Becker's shareholdings collapsed along with the bank he led in recent weeks, Matt writes.
State of play: His shares in the tech-centric institution were worth roughly $60 million at the height of the market in late 2021.
- The line above incorporates changes to both the number of shares he owned and the price of the stock — the final value is as of Friday morning, shortly before the bank was seized by the FDIC. (For all intents and purposes, the value of SVB shares is now zero.)
The intrigue: Becker sold shares worth roughly $3.6 million in late February, which federal investigators may be taking a look at.
Why it matters: Aside from regulations aimed at making banks safe, a key way to dissuade reckless behavior is ensuring executives feel pain when they blow up their institution. If SVB executives lose a fortune in this mess, that’ll surely get the attention of other top bankers.
- Related: Becker lost his job. He was replaced as CEO when the bank was taken over by the FDIC.
Worth noting: Outside of equity awards — the bulk of his compensation — Becker was still paid pretty handsomely. He took home salary and cash incentive payments of about $6.7 million over the last two years.
1 last thought from Matt: I've been avoiding thinking much about AI. (When I do, it triggers a wave of panicky dread deep inside.) But, I have to say, these AI-created portraits of American presidents as professional wrestlers are solace. We may at least get a few yuks out of AI before the army of armed, self-aware robot dogs come for us. I think my favorite is Grover Cleveland (first term!).
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Markets is edited by Kate Marino and copy edited by Mickey Meece.