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Originally Posted by mostpost
I am far from an expert on banking regulations. If you know squat plus very little.
This is what I do know. Trump changed the threshold for which banks could be regulated from banks with assets over $50B to banks with over $250B. This meant many very large banks were no longer subject to regulation.
Nobody is saying deregulation is the only problem. Bad decisions by SVB is certainly a major factor. But proper regulations may have caught those bad decisions before they caused such damage...
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In post#80 on page 6 of the other thread Mike/Paceadvantage posted a reply to your post about the Dodd-Frank-Trump rollback. He linked to a
Business Insider article quoting Barney Frank, former Chairman of the House Financial Services Committee and co-author/co-sponsor of Dodd-Frank.
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Notably, Barney Frank, co-author of the Dodd-Frank Act, told Bloomberg on Sunday that if his original bill wasn't passed, "we'd be seeing a lot more damage these days," but he doesn't necessarily blame Trump's rollbacks for SVB's fallout.
"I don't think that had any effect," Frank said. "I don't think there was any laxity on the part of regulators in regulating the banks in that category, from $50 billion to $250 billion."
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Do you have a response to that? I'd be interested in your own thoughts.
Below are some of my thoughts about why Silicon Valley Bank in California and Signature Bank in New York went under:
It was incompetence.
We've had Goldilocks conditions and easy money for so long that many of the acting members on the Boards of Directors of present day banks got caught off guard.
There's also the makeup of the members on the Boards of Directors of present day banks.
According to this
MSN article, Silicon Valley Bank's Board of Directors had just a single member with actual investment banking experience.
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Just one member of Silicon Valley Bank's board of directors had a career in investment banking, while the others were major Democratic donors, it has been revealed.
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They never saw it coming.
But Imo, if you are on the Board of Directors of a bank:
You should have seen it coming.
If not you never should have been on the Board of Directors of a bank in the first place.
Because it's your freaking job to see it coming.
Fed policy over the past 13 years (zero interest rates/quantitative easing) led to massive amounts of VC money pouring into startups - 90% of which will never be profitable.
This, combined with runaway spending by Congress, created an environment of easy money.
Injecting too much money into the system ALWAYS (as in all throughout recorded history) creates inflation.
Remember when they told us
Inflation is transitory?
Remember when the Fed told us we have
Tools to fight inflation?
Q. Do you know what those tools are?
A. Higher interest rates.
High enough for long enough until something breaks.
And to a lesser extent quantitative tightening. The Fed selling bonds that were added to its balance sheet during quantitative easing.
That's the playbook.
Higher interest rates for long enough until something breaks.
Well something broke.
Customers have very little say when it comes to regulation of the banking industry.
But they absolutely DO have a choice when it comes to where they keep their money.
And when you think your money is at risk because your bank doesn't have enough assets to cover account balances:
You get your money out.
And that's exactly what happened.
Banks make money by taking in deposits and:
1. Loaning out money at a higher interest rates than they pay on deposits.
2. Investing money and earning higher rates of return than they pay on deposits.
3. To a lesser extent nickeling and diming us with fees.
Silicon Valley Bank had too much money tied up (relative to deposits) in long term low interest rate securities.
When inflation arrived - as it ALWAYS does when too much money is injected into the system:
The Fed began using its Tools:
Higher interest rates for long enough until something breaks.
As the Fed hiked interest rates month after month the value of Silicon Valley Bank's long term low interest rate securities fell.
Eventually the value of securities held by Silicon Valley Bank became less than the amount of money customers had on deposit.
And the result was a good old fashioned bank run.
ZeroHedge 03-15-2023
Passing The Buck On The SVB Bank-Run:
https://www.zerohedge.com/markets/pa...k-svb-bank-run
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Over the last 72 hours, the demise of Silicon Valley Bank has been dissected in the media. What went wrong seems perfectly clear. SVB had a deluge of short-term deposits coming into the bank during the pandemic. Almost 90% of those deposits exceeded the FDIC’s insurance limits of $250,000. The bank invested those deposits in billions of dollars of low-rate, long-term debt issued by the federal government and government agencies. When rising interest rates eroded the value of those investments, their depositors, fearing SVB would fail, pulled their deposits out of the bank. Unable to meet the demand for cash, the bank closed its doors. It was a classic run on the bank.
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In 1991, I wrote my senior thesis, “The Effects of Asset Size on the Level of Interest Rate Risk in Commercial Banks.” While that may seem like a particularly dull topic to fixate on for a semester, at the time it was timely. On Sept. 19, 1990, Charles Keating, the former CEO of Arizona-based Lincoln Savings and Loan Association, appeared on the front page of the New York Times in handcuffs. Keating was the poster child of financial mismanagement in the savings & loan crisis, having spent company money lavishly on personal luxuries. That crisis eventually cost U.S. taxpayers over $130 billion and almost ended the political career of a first-term United States senator, John McCain, who was one of five senators who intervened with regulators on behalf of Lincoln Savings. S&L executives went to jail. One-third of all thrifts failed. And, yes, shareholders, bondholders, and even some depositors lost billions of dollars.
Financial fraud committed by Keating and others was clearly partially to blame for the crisis that ensued. The primary villain, however, was something far more mundane and the same thing that took down Silicon Valley Bank: interest rate risk. S&Ls were legally required to invest almost exclusively in long-term, fixed-rate home mortgages. When interest rates skyrocketed in response to the inflation of the 1970s and 1980s, depositors fled S&Ls for newly formed money market accounts that paid four times as much interest. Unable to meet depositor demands without selling their low-rate mortgage portfolios at a significant discount, most S&Ls were technically insolvent. The government came up with an accounting gimmick that allowed them to write off their losses on mortgages over a long period. That fix ensured that S&Ls kept their doors open for the time being. The losses they were writing off were so large, however, if the S&Ls didn’t make high-risk, high-return investments, something they were ill-prepared to do, their failure was certain.
The question that I was looking to unpack in my thesis was simple: Are big banks better than small banks at managing interest rate risks? Having worked at a small, rural bank during the summers, I was exposed to the very detailed work they did every month to measure what would happen to the bank’s portfolio in varying interest rate environments. This was a topic of discussion at every monthly board meeting and impacted the types of loans and investments the bank was willing to make.
Larger banks had access to more sophisticated tools for managing interest rate risks. I wanted to know whether those tools were more effective than the simple measures available to a country bank. Based on the data available at the time, small banks were just as effective at managing interest rate risks as large banks.
When the Silicon Valley Bank debacle is unpacked, like the savings and loan crisis, there will be plenty of blame to spread around. Regulators, the Trump administration, and politicians who received SVB’s financial support, purportedly for supporting changes to banking regulations, are already being vilified in the press and on social media. Populist politicians from both sides of the aisle (except those from California and New York) are already pointing their fingers at venture capitalists who stoked the fear of a contagion in order to cajole the government into backstopping SVB, thereby saving themselves billions of dollars.
The failure of SVB, however, is driven almost exclusively by one thing – incompetence. Both regulators and bank management ignored something that almost every country banker in 1990 had figured out – you can’t finance long-term investments with short-term money.
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