Can we learn the right lessons from SVB?

Predictably, the usual blame game ensued after Silicon Valley Bank (SVB) went south. I won’t remind readers who pointed fingers at who, but the blame deflecting is beyond tiresome. There are lessons to be learned and mistakes to avoid repeating. But will we?

The failures of Silvergate and Signature Banks are primarily related to crypto and some consider them to be meaningless, but SVB is a different story. Its practice of borrowing short by holding customer deposits to lend long by purchasing long bonds and mortgage-backed securities must be regulated out of existence. Part of market discipline is obeying the rules and having them enforced, but the rules must exist in the first place.

Some believe the Federal Reserve, the U.S. Department of Treasury, and the Federal Deposit Insurance Corp. should have allowed wealthy investors to get a well-deserved haircut instead of a bailout — and yes, that’s what it was — and they contend this was the inevitable result of the perverse incentives created by years of negative real interest rates. Others believe that financial officials had no choice but to protect all bank deposits — even in accounts with balances exceeding the $250,000 insured threshold — or depositors with holdings exceeding $250,000 would have led a run on the banks. Some in the latter group further contend that Congress should increase the deposit insurance threshold because only 50% of deposits at commercial banks are insured.

Certainly bank regulators can do a better job of preventing an overconcentration of loans in one area like the technology sector, another one of SVB’s failings, but why can’t we outlaw the practice of putting a significant amount of excess liquidity (short-term deposits) in long-term securities (10-year, mortgage-backed securities), essentially betting the farm on forever-low interest rates. When inflation reared its ugly head and the Fed raised interest rates to fight it, that practice turned out to be a bad bet.

Will there be regulation to prevent more banks from putting themselves in prison with an interest rate squeeze? At press time, the answer was not yet. Perhaps elected officials are counting on bank regulators to do a better job, but in the case of SVB, since acquired by First Citizens, the regulators were as effective as the lookout at Pearl Harbor. I’ve said it before and I’ll say it again: It’s not about more regulation. It’s not about less regulation. It’s about smart regulation and vigorous enforcement.