Last week, the banking world seemingly turned upside down when the tech industry-centered Silicon Valley Bank collapsed. Conjuring up black-and-white footage of the 1930s, depositors scrambled to withdraw $42 billion last Thursday. Ironically, this was the kind of bank run that only technology could make possible: in September 2008, when Washington Mutual collapsed, the bank run lasted 10 days and withdrew “only” $16.7 billion.
Two other tech-centered banks — New York-based Signature Bank and San Diego-based Silvergate Bank — subsequently collapsed, forcing the Federal Deposit Insurance Corporation (FDIC) to take them over. This led to panic and fears of a broader banking crisis — a spiral exacerbated by social media — and calls from leading Democrats for more regulation.
Colorado’s congressional delegation would be wise to act judiciously and carefully, rather than promoting any kneejerk regulatory measures. Put simply, what happened here isn’t your typical cause of a bank collapse.
Historically, banks have run into trouble because they’ve given out loans to borrowers that ended up unable to pay it back. Case-in-point: The 2008 financial crisis, where mortgage lenders disbursed subprime mortgage loans that were never going to be paid back. Now, though, something different is at play.
Silicon Valley Bank, for example, primarily held deposits for tech startups. Those companies received most of their cash from venture capital firms, and they needed somewhere to put it. The nation’s 16th-largest bank turned out to be the main go-to bank to hold the investors’ money.
Traditionally, a bank loans deposits back out to businesses or individuals. Since Silicon Valley Bank wasn’t predominantly in the business of giving out loans — as it was primarily a place for tech companies to hold their money — they found alternative things to do with the money. In the low interest rate environment of 2021, the bank reclassified securities for regulatory purposes as “hold-to-maturity” Treasury bonds, which are supposed to maintain their value until the maturity date.
When the credit rating firm Moody’s announced it was downgrading Silicon Valley Bank — apparently a call they should have already made — the bank’s depositors made their $42 billion run on the bank. But the bank didn’t have enough liquidity (cash that could be returned to depositors), so they had to sell those “hold-to-maturity” bonds early to boost the bank’s liquidity.
Because the Federal Reserve has driven up interest rates to combat inflation — and the price of a bond declines inversely with higher rates — Silicon Valley Bank’s bonds were sold early at a whopping $1.8 billion loss. The FDIC stepped in to take over the bank and ensure that depositors would be made whole. Fundamentally, the problem was one of poor risk management by the bank amid rising interest rates.
As former Federal Reserve advisor Danielle DiMartino Booth told me on 710KNUS radio, "if you get caught out, as Silicon Valley Bank did, with a deposit run on the bank, you are forced to sell these securities to raise cash — recognizing losses in such a quick fashion, that the FDIC comes and closes you down in one day.”
Some Democrats, including President Joe Biden and Massachusetts Sen. Elizabeth Warren, argue this is the consequence of a 2018 law passed under former President Donald Trump and a then-Republican Congress. The legislation, which notably won the vote of Colorado Sen. Michael Bennet, eased regulatory requirements on regional banks with less than $250 billion in assets.
It was the right call by Bennet, who was joined by then-Sen. Cory Gardner and all four Colorado House Republicans at the time. That’s because the onerous regulations put in place in the 2015 Dodd-Frank law were extremely harmful to smaller banks, particularly forcing many community banks to consolidate with larger banks and thereby exacerbating “too big to fail.”
Claims by Biden and Warren that the 2018 law is at the root of the problem don’t hold up. Recall the aforementioned hold-to-maturity bonds: This kind of long-term Treasury bond doesn’t show up on the bank’s balance sheet as a liability, making it seem like the bank had more liquidity than it actually did. Consequently, “hold-to-maturity” was not an honest approach — but it also isn’t a strategy that regulators or Congress could have anticipated.
Let’s be real: U.S. Treasury bonds are considered among the “safest” investments one can make. The idea that Congress could have predicted a bank like Silicon Valley Bank would use a Treasury bond in this way is unrealistic. They could not have foreseen a bank putting depositor funds into held-to-maturity bonds. In fact, as author Keith Nobles said, “regulation fails when people go outside the boundaries and regulators can’t even figure that out.”
Government regulators are decent at regulating things after they happen — not at predicting new things to regulate in dynamic financial markets. Even then, it usually takes months to really figure out what happened, why and how to address it.
In a letter with colleagues on the House Financial Services Committee, Colorado Rep. Brittany Pettersen urged regulators to “consider additional oversight measures to ensure that a bank’s asset mix can adequately provide liquidity during a stress event.”
Yet the overall banking sector is likely largely fine. Reportedly, Bank of America’s deposits are up $15 billion this week, and Colorado banks like First American State Bank report more deposits — indicating most banks are in decent shape as depositors move money elsewhere. Congress should not move rashly by acting like the current bank panic is something it isn’t — and Bennet shouldn’t advocate undoing his 2018 vote.
Jimmy Sengenberger is an investigative journalist, public speaker, and host of “The Jimmy Sengenberger Show” Saturdays from 6 a.m. to 9 a.m. on News/Talk 710 KNUS. Reach Jimmy online at JimmySengenberger.com or on Twitter @SengCenter.
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