Column: The collapse of the Silicon Valley bank could be a blessing in disguise

With the brief but spectacular collapse of Silicon Valley Bank, we may have just witnessed the best banking crisis of all time.

It might even have been useful.

No one was seriously hurt except for bank executives who made bad decisions and shareholders who weren’t careful.

Those Silicon Valley libertarians who spent years demanding the government get out of the way deserved their compensation when they begged the Federal Reserve to bail them out. “Where is [Federal Reserve Chair Jerome H.] Powell? Where is [Treasury Secretary Janet L.] Yellen? Stop this crisis NOW” tweeted David Sacks, the tech investor who was a fan of creative destruction until it got too close to his bank account.

Just as there are no atheists in foxholes, there are no libertarians in financial panics.

Republican politicians added a dash of comedy, blaming the imaginary threat of “woke banking” for SVB’s financial failures. There is no evidence that bankers’ political leanings, “woke” or otherwise, have affected their balance sheets.

The rest of us have been given a useful reminder of why free-market capitalism needs to be regulated: to protect the little guy (and sometimes not-so-little guys) from disaster.

Most importantly, the Fed and Federal Deposit Insurance Corp. (FDIC) received a wake-up call that their supervision of mid-sized banks was dangerously lax.

The collapse of the SVB, scary as it was, could be a useful corrective to excessive banking deregulation, like a brief health crisis prompting people to exercise more and eat better.

Despite the bewildering complexity of high finance, the history of SVB turned out to be fairly simple. The bank parked too much money in long-dated government bonds, which fell in value as interest rates rose. That left the SVB without enough assets when a bunch of its depositors decided to withdraw their money at once – which they did.

But the SVB’s weakness shouldn’t have come as a surprise. The bank reported its problems in the public annual financial statements last fall. The Wall Street Journal ran an article on the wealth crunch in November, nearly four months before the tech brothers panicked.

The mystery is why neither SVB boss Greg Becker nor the federal and state agencies tasked with regulating the bank acted to prevent the crisis. The Fed or California’s Treasury and Innovation Department could have asked SVB to raise more capital last year when it was less vulnerable. They didn’t.

“Regulators were asleep at the counter,” Lawrence J. White, a banking expert at New York University’s Stern School of Business, told my colleague Don Lee.

When SVB’s big depositors began their rush earlier this month, it was too late.

For Powell and Yellen, the Palo Alto panic sparked runs on other mid-sized banks nationwide.

So they stepped in, confiscated the SVB and said they would guarantee all accounts, even those over the FDIC insurance limit of $250,000.

This counts as a bailout. It is paid for by bank fees rather than tax money, but each bank customer bears the invisible costs.

Still, it was better than the alternative: more bank panics and more damage to the economy.

The decision to cover uninsured deposits over $250,000 prompted hand-wringing over “moral hazard.” In theory, capitalism regulates itself by punishing risky behavior – for example putting too much money in a bank. When the government bails out people who are making bad bets, they have no incentive to avoid taking inappropriate risks.

But the SVB rescue operation was not unprecedented. The FDIC and the Fed have quietly bailed out most uninsured depositors since 2008.

Becker will get a chance to explain himself at congressional hearings, the Capitol Hill version of the Walk of Shame on “Game of Thrones.” He’s probably being asked if he really was too awake to notice his long-term bonds falling in value.

Regulators are also being held accountable, not just by longtime critics like Senator Elizabeth Warren (D-Mass.). Last week, a dozen senators, including Kyrsten Sinema (I-Ariz.) and JD Vance (R-Ohio), asked the Fed why it hadn’t investigated the SVB.

There is already a list of possible fixes. Congress could re-impose so-called stress tests on mid-sized banks, a rule it scrapped in 2018. The Fed could re-impose liquidity requirements on these banks, a rule Powell eased in 2019. The FDIC could raise the deposit insurance cap to over $250,000 and charge banks for the cost.

The test is coming in six months: is the Fed doing more? Are banks? And do the voters still pay attention?

The nervousness of the banking system is not over yet. The government is still trying to sell what remains of the SVB. San Francisco-based First Republic Bank still looks shaky, even after a $30 billion deposit injection.

But at least for a moment, we can breathe a sigh of relief. If all financial crises could be resolved as quickly as this one, capitalism would be a little less scary.

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