Careless Supervision Sank SVB

How did California, the FDIC and the Fed all fail to pick up what now seem like obvious red flags?

By Lawrence B. Lindsey. Excerpts:

"Sen. Elizabeth Warren and other Democrats blame Silicon Valley Bank’s failure on changes to the Dodd-Frank Act of 2010 enacted during the Trump administration. That claim has no basis in fact. The Bank Policy Institute concluded that SVB would have passed the original Dodd-Frank liquidity-coverage test and that the 2018 changes were irrelevant."

"regulations tend to devolve into the check-the-box variety that makes sense to lawyers and allows bureaucracies to implement them."

"bank supervisors from California, the Federal Deposit Insurance Corp. and the Federal Reserve Bank of San Francisco failed to pick up some red flags"

"The bank had no chief risk officer between April 2022 and January 2023. This was the period in which the Federal Open Market Committee raised rates aggressively. The bank got into trouble because it had over-bought longer-dated Treasury bills when rates were low—only to watch their market value shrink as interest rates went up. Any risk officer would know that a bank facing a potentially rapidly shrinking deposit base shouldn’t overcommit to long-dated assets. Not having a CRO in place should have been a red flag.

Bank examiners should have seen this as well."

"the San Francisco Fed . . . should have told the bank examiners under their supervision to pay special attention to the impact on the banks they examine."

"SVB committed $5 billion to a new environmental program, roughly the bank’s average annual profit over the previous three years."

"There is also the irony that former Rep. Barney Frank, whose name is on the Dodd-Frank legislation, was on the board of Signature Bank, which was also shuttered this month. Mr. Frank is a smart man with the best of intentions, but the failure of Signature indicates a regulatory mindset that misses the big picture. The regulations go over the asset side of banks’ balance sheets with a fine-tooth comb for credit risk. But SVB and similar banks are in trouble because of the liability side of their balance sheets (with depositors who were quick to run) and the term-structure risk embedded in their long-dated Treasury positions, which had no credit risk."