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Five things we learned from the Senate hearing on the Silicon Valley Bank collapse

edited March 2023 in Other Investing
Following are heavily edited excerpts from a current NPR report.
Days after one of the largest bank failures in U.S. history, the fallout continues. Some of the country's top banking and financial regulators appeared before the Senate Banking Committee on Tuesday to testify about what led to the downfall of Silicon Valley Bank. Policymakers will be debating whether new laws, rules or attitudes are needed to keep other banks from going under.


Five takeaways from Tuesday's hearing:
• Silicon Valley Bank's management messed up
• Regulators issued warnings, but the problems were not fixed
• Modern bank runs can happen really fast
• Other banks will pay for the failure, but maybe not all banks
• Bank executives could pay


• Silicon Valley Bank's management messed up-
Regulators had some tough words about SVB's management at the hearing. Silicon Valley Bank more than tripled in size in the last three years, but its financial controls didn't keep pace.

The government bonds it was buying with depositors' money tumbled in value as interest rates rose, but the bank seemed unconcerned by that. "The [bank's] risk model was not at all aligned with reality," said Michael Barr, the Federal Reserve's vice chair for supervision. "This is a textbook case of bank mismanagement."

• Regulators issued warnings, but the problems were not fixed-
How much blame should be laid at regulators feet? That was a question that cropped up repeatedly during the hearing.

Barr stressed that federal regulators had repeatedly warned the bank's managers about the risks it was facing, at least as far back as October 2021. The bank was served with formal notices documenting "matters requiring attention" and "matters requiring immediate attention." But the risks remained and the Fed stopped short of ordering changes, which frustrated some of the senators in the Senate Banking Committee from both sides of the aisle.

The problems developed during a time when the Fed was generally pursuing a light touch in bank regulation. In 2021, for example, the Fed issued a rule — at the urging of bank lobbyists — noting that guidance from bank supervisors does not carry the force of law. That led some senators to call out colleagues who pushed for lighter rules, only to turn around and blame a lack of regulatory muscle for the bank's failure.

• Modern bank runs can happen really fast-
In their testimony, regulators also stressed the speed at which the banks collapsed. When big depositors got wind of the problems at Silicon Valley Bank, they raced to pull their money out, withdrawing $42 billion in a single day. The bank scrambled to borrow more money overnight, but it couldn't keep up. By the following morning, depositors had signaled plans to withdraw another $100 billion — more than the bank could get its hands on.

• Other banks will pay for the failure, but maybe not all banks-
Also under scrutiny throughout the testimony, was the federal regulators' decision to backstop all deposits at SVB as well as Signature Bank. Silicon Valley bank was taken over by the FDIC on March 10, but fears of a more widespread bank run led regulators to announce days later they would guarantee all the deposits at both SVB and Signature Bank, not just the $250,000 per account that's typically insured.

By law, that money will come from a special assessment on other banks — and that's left many senators unhappy. The FDIC has some discretion in how those insurance costs are divided up among different categories of banks. A recommended formula will be announced in early May.

• Bank executives could pay-
The role of SVB's top executives came under scrutiny as well during the hearing. Lawmakers expressed frustration at reports that executives at Silicon Valley Bank sold stock and received bonuses shortly before the bank's collapse.

Although the government doesn't have explicit authority to claw back compensation, it does have the power to levy fines, order restitution and prohibit those executives from working at other banks, if wrongdoing is found. Sen. Chris Van Hollen, D-Md, said "Almost every American would agree it's simply wrong for the CEO and top executives to profit from their own mismanagement and then leave FDIC holding the bag,"

Comments

  • edited March 2023
    Cluster flop. Guidance, warnings, deficiencies pointed out..... and IGNORED. What a hot mess. Old, rotting spooge.
  • edited March 2023
    It's a mell of a hess but there's a tiny bright spot there; sounds like it was a halfway decent and productive Senate hearing.
  • edited March 2023
    I watched an hour’s worth - off and on. What strikes me is the unfairness of the situation. Why Oh-why were the owners of uninsured assets at SVB bailed out while no such blanket guarantee extends to others who might find themselves in a similar situation at another bank? If the jello hits the fan elsewhere and no similar guarantee is granted, the screams will be loud. Perhaps it was a necessary action - but we’re talking about hundreds of thousands of dollars of real money owned by real people - not some “dot-plot” on a napkin. Where’s the fairness?
  • msf
    edited March 2023
    Some uninsured depositors lucked out by getting coverage. We can complain all we want about how they shouldn't have gotten covered, verily how they exacerbated the problem. Still, depositors at other institutions aren't being shortchanged a nickel. They are getting all the coverage they bargained for.

    We've heard this sort of complaint before, e.g. from notch babies. With that cohort, as with depositors insured "only" up to $250K, the fact that someone else received a windfall does not mean that you should also receive more than you're entitled to.
  • edited March 2023
    From OP:

    "In 2021, for example, the Fed issued a rule — at the urging of bank lobbyists — noting that guidance from bank supervisors does not carry the force of law. That led some senators to call out
    colleagues who pushed for lighter rules, only to turn around
    and blame a lack of regulatory muscle for the bank's failure.
    "


    The epitome of political hypocricy...
  • edited March 2023
    I’ll say again I am struck by the unfairness. Consider the following scenario:

    - Being the frugal responsible type, I drive a $12,000 Chevy Spark for which I pay and receive collision insurance coverage.

    - My irresponsible next door neighbor drives a $100,000 BMW and elects not to carry insurance.

    - Neighbor wrecks BMW.

    - My insurer decides to cover neighbor’s loss. Says it will recoup its expenses by raising my insurance rates and those of other paying customers.

    - I ask - Where’s the fairness in this?

    Issue not easily dismissed by red herring arguments. Of course other instances of injustice have existed throughout history. Doesn’t in any way explain or justify this instance.
  • Truth. It just bites. It does. Welcome to the Machine. You and I don't matter.
  • Insurance companies do use neighborhood (ZIP Codes) or geographical data.

    So, if you drive "Chevy Spark" in a neighborhood where residents have expensive cars, or have high accident rates, or there are more thefts, then the insurance rates may go up for EVERYBODY in that neighborhood. This may sound unfair, but insurance companies are looking at this as their risk pools for auto, home, property insurance.

    When I have called insurance companies about rate bumps when I have had NO recent claims, this has been cited as one of the reasons for rate bumps. Other reasons are inflation, etc.

    Life insurance is different. The risk determination happens only when one buys it. Then, it may remain fixed (for permanent life insurance) or change only by age (term life insurance). It is insurance company's risk if pandemics happen or some medical miracles may prolong life-expectancies.
  • ssue not easily dismissed by red herring arguments. Of course other instances of injustice have existed throughout history. Doesn’t in any way explain or justify this instance.

    I think you missed my point. Depositors who get "only" $250K of insurance are not being cheated. They are getting their fair share of coverage. It's the fact that someone else is receiving extra that's the red herring. Sure you're envious, sure you think they shouldn't have gotten that extra coverage, but that's got nothing to do with how much coverage you fairly deserve - $250K.

    My insurer decides to cover neighbor’s loss. Says it will recoup its expenses by raising my insurance rates and those of other paying customers.

    You bring up cost, suggesting that this windfall (SVB depositor unlimited coverage) to others is costing you money. As has been recently pointed out, the FDIC bailout will be paid for by other banks, not by taxpayers. So the broad populace isn't bearing the insurance cost.

    What about the costs you bear indirectly as a customer of a bank being assessed for this bailout? In 1993 the FDIC changed the way it charged banks for coverage - the more risky the bank, the more they were charged (risk-based premiums). So some of this is already built into the system. And unlike the auto insurance example that's based by neighborhood, this premium discrimination appears to be done bank by bank.

    From what OJ posted at the top, it looks like the cost of the bailout might also be apportioned among banks according to the risks they pose. IMHO that would be a good idea.

    Finally, in your example, your neighbor was uninsured, rather than underinsured. There's a red herring FDIC does not bail out non-member banks. Those banks don't pose systemic risks because depositors at FDIC member banks will not start pulling money out upon seeing a non-member bank failing.
  • edited March 2023
    BTW, now that SVB and Signature banks have been acquired by other banks, the normal FDIC coverages have resumed. So, the unlimited coverage applied for days while the Fed was operating them. Of course, under the new bank ownerships, there is no reason for the runs to develop for excess deposits. Well, that is the PLAN.
  • Half of the deposits that remained post seizure have already flown the coup:
    $119B in Silicon Valley Bridge Bank deposits on March 10th.
    $56B in deposits transferred (sold) to First CItizens
    -----
    $63B in deposits pulled out of the bridge bank.

    https://finance.yahoo.com/news/silicon-valley-bank-rapid-withdrawals-100029288.html ($119B)
    https://www.reuters.com/markets/deals/first-citizens-said-be-near-deal-silicon-valley-bank-bloomberg-news-2023-03-26/ ($56B)

    There's always a risk of failure. Just as we saw a move to government MMFs after Reserve Fund broke a buck, some large depositors have wised up to the fact that uninsured really means "at risk". Even though the Treasury provided temporary insurance after Reserve Fund failed and even after the FDIC covered all depositors at SVB.
  • I'm not bothered at all by the extra coverage some uninsured depositors received at SVB. I'm just glad the FDIC agrees to guarantee deposits up to $250,000. Some libertarians want to go back to pre-1933 and eliminate FDIC guarantees for any amount. OH hell no !
  • edited March 2023
    There was only 1 type of m-mkt fund during the GFC 2008.

    The Fed then started unlimited insurance for m-mkt funds for 10 bps fees from 2008-10. After some resistance from big players, all complied.

    From the lessons learned, m-mkt reforms of 2014/16 created 3 tiers of m-mkt funds - government, prime-retail, prime-institutional.

    Huge shift into the government m-mkt followed.

    But that was so huge that it may have damaged the commercial paper market.

    So, the m-mkt reforms are being looked again - so soon.
  • edited March 2023
    Undiscussed in the above comments is the aspect that the "bonus" coverage was as much designed to temporarily stabilize the entire small/medium banking sector as to cover the uninsured SVC depositors. If a contagious series of bank runs had ensued it would of had a huge destructive effect on the entire financial structure, including the stock markets, potentially causing grief for everyone- insured and uninsured alike, "good" and "bad" banks, and their customers... alike.
  • +1 old joe excellent synopsis of the situation!
  • It's a variant of TBTF bailouts. If the bank's insolvency doesn't rock the boat, it goes under. But if it is large enough to affect the financial structure .... A variant of the aphorism:
    If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.
    https://www.brainyquote.com/quotes/j_paul_getty_129274
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