Silicon Valley Bank’s spectacular collapse last week has left many bank customers with an all-too-familiar question: Is my money safe?[0] The Federal Deposit Insurance Corporation (FDIC) took control of the bank in the second-largest bank failure in US history, and the Federal Reserve Board promised to protect all depositors, up to the $250,000 insured by the FDIC.[1] But the failure of the bank has raised broader questions about the health of the financial sector, and why the FDIC stepped in when it did.
Management of SVB is primarily responsible for the disaster.[2] Regulators should understand that they are in place because bankers are often tempted to take risks.[2] Bankers often attempt to expand rapidly, acquire loans at low interest rates, lend money liberally, and secure their investments for extended periods in the pursuit of higher yields.[2]
As early as last November, one journalist had noticed the increasing risks that banks, including Silicon Valley Bank, were facing; the head of the Federal Deposit Insurance Corporation had also cautioned about the dilemma.[2] Some short sellers began to take a bearish stance on the bank’s stock.[2] The irresponsible behavior of bankers and a lack of oversight from regulators have culminated in a severe financial crisis, leading to a government bailout. Regulators have vowed to be more vigilant in the future, although this is a promise that has been heard before.[3]
For most of the year, Silicon Valley Bank had not had a chief risk officer, which was far from ideal.[2] Jeff Hauser, the founder and director of the Revolving Door Project, a D.C. nonprofit that follows the regulatory sector, informed me, “Regulators had to be aware of this, and it has to be significant.”[2] Once we regard success as a sign of intelligence, it becomes difficult for a lowly bank examiner to express that “This institution does not have an individual in charge of risk management and does not have a strategy to handle the risk associated with its assets.”[2]
Regulators of banks possess incredible authority.[2] A bank’s operations can be examined and changes can be demanded by them.[2] They rarely solve the problem.[2] Chris Whalen, a long-time financial analyst, informed me that the regulators are comparable to all of the conflicted agents in the ratings agencies and other fields.[2] In prosperous times, they go along with the tide; however, in difficult times, they fail to deliver.[2]
0. “Here’s who made money amid the Silicon Valley Bank turmoil” ABC News, 17 Mar. 2023, https://abcnews.go.com/Business/made-money-amid-silicon-valley-bank-turmoil/story?id=97877087
1. “Congressman discusses why Silicon Valley Bank failed – San José Spotlight” San José Spotlight, 17 Mar. 2023, https://sanjosespotlight.com/us-congressman-ro-khanna-discusses-why-silicon-valley-bank-svb-failed/
2. “So Where Were SVB’s Regulators?” The Atlantic, 17 Mar. 2023, https://www.theatlantic.com/ideas/archive/2023/03/silicon-valley-signature-bank-collapse-regulator-culture/673423/
3. “What Silicon Valley Bank Collapse Reveals About Regulation” ProPublica, 17 Mar. 2023, https://www.propublica.org/article/silicon-valley-bank-failure-fdic-fed-failure