The Silicon Valley Bank Bailout

The bill for bad policy comes due, but there’s risk in a second rescue of the banking system in 15 years.

WSJ editorial. Excerpts:

"SVB’s failure is the bill coming due for years of monetary and regulatory mistakes."

"SVB executives made mistakes, and they will pay for them, but they were encouraged by easy money and misguided regulation. As the Fed flooded the world with dollar liquidity, money flowed into venture startups that were SVB’s customer base. The bank’s deposits soared—far beyond what it could safely lend.

In a world of near-zero interest rates, SVB put the money in long duration fixed-income assets in search of a higher return. Regulators after the 2008 crisis had deemed these Treasury bonds and mortgage-backed securities nearly risk-free for the purpose of measuring bank capital. If regulators say they’re risk-free, banks and depositors may be less careful.

"But those securities declined in value as the Fed took interest rates up quickly to break the inflation it helped to cause. SVB had enormous capital losses if it were forced to liquidate those assets before maturity. That’s exactly what happened as SVB customers withdrew their deposits. The San Francisco Fed regulates SVB and somehow missed this rising vulnerability."

The FDIC created an entity to protect SVB’s insured depositors up to the legal limit of $250,000. But something like 85% to 90% of SVB’s deposits are uninsured. The worry is that depositors in other banks will now flee.Thus the cries for federal intervention."

"The feds said they will guarantee even uninsured deposits at SVB"

"Typically in a bank failure those depositors would get their money back with a 15% to 20% haircut. This would no doubt be a hardship for many customers, but the $250,000 limit was known."

"Congress set the $250,000 insured limit to protect average Americans, not venture investors in Silicon Valley.

The FDIC may have resorted to its “systemic risk exception” for SVB and Signature, but this is a stretch considering their size."

"The Fed is acting as it should as a provider of liquidity to all comers. But it’s going further and offering one-year loans to banks against collateral of Treasurys and other fixed-income assets. The Fed will value these assets at par, which means banks don’t have to sell their assets at a loss. The Fed is essentially guaranteeing bank assets that are taking losses because banks took duration risk that Fed policies encouraged. This too is a bailout."

"The critics have a point. For the second time in 15 years (excluding the brief Covid-caused panic), regulators will have encouraged a credit mania, and then failed to foresee the financial panic when the easy money stopped."