How did SVB operate
In this commentary, John Cochrane explains why SVB failed: in a nutshell two issues lead to the collapse, namely “duration mismatch” and run-prone uninsured depositors. SVB was paying slightly higher interest rates than bigger banks and attracted large deposits from venture capital backed firms which in their majority were uninsured (only the first $250,000 are insured). SVB then put much of that money into long-maturity bonds, to reap the difference between higher long-term interest rates and what it paid on deposits.
How did SVB become the bank of venture capital backed firms?
VC invests in a new company. SVB offers an additional few million in debt, with one catch, the company must use SVB as the bank for deposits. SVB invests the deposits in long-term mortgage backed securities. SVB basically prints up money to use for its investment!
Silicon Valley Bank Blinders
By: John Cochrane – Hoover Institution, Stanford University
A regulatory failure?
In this commentary, Joseph Stiglitz argues that the SVB collapse is indicative of regulatory and monetary policy failures:
Let’s hope that those who helped create this mess can play a constructive role in minimizing the damage, and that this time, all of us – bankers, investors, policymakers, and the public – will finally learn the right lessons. We need stricter regulation, to ensure that all banks are safe. All bank deposits should be insured. And the costs should be borne by those who benefit the most: wealthy individuals and corporations, and those who rely most on the banking system, based on deposits, transactions, and other relevant metrics.
Another Predictable Bank Failure
By: Joseph Stiglitz – Columbia University
The moral hazard issue
Bailouts tend to make the issue of moral hazard even worse because they make people behave even more recklessly in the future, argues Scott Sumner:
Obviously most banks don’t fail even under our dysfunctional system, but the problem is getting steadily worse despite an endless series of regulatory fixes that don’t address the root cause of the problem. When regulators plug one gap, banks find an alternative method of loading up on risk.
Another misconception is that we cannot reduce moral hazard because big depositors don’t pay attention to bank risk. Of course they don’t. Why should they? But what if they feared losing their money?
The only solution is to reduce moral hazard. Instead, we are moving in exactly the opposite direction—adding to moral hazard. Financial crises will get ever more frequent in the decades ahead.
Promises, promises
By: Scott Sumner – George Mason University
Silvergate Bank
Before SVB, Silvergate also failed on March 8, 2023:
Silvergate Bank bled to death after announcing significant delay to its 10-K full-year accounts and warning that it might not be able to continue as a going concern. We will never know whether it could have recovered from the bank run after the failure of FTX. The bank run after the announcement was far, far worse. The exit of its major crypto customers sealed Silvergate’s fate.
Silvergate Bank – a post mortem
By: Frances Coppola
