6 theories on Silicon Valley Bank's failure
There’s no shortage of alleged villains, half villains and nonvillains surrounding the collapse of Silicon Valley Bank.
The regulators did it.
It might be more accurate to say the regulators failed to do it.
Part of the bank’s failure can be traced to a 2018 rollback of rules requiring that regional banks such as Silicon Valley Bank be subject to certain “stress tests” ensuring that they were robust.
Instead, The New York Times details how supervisors at the Federal Reserve Bank of San Francisco began citing SVB for weaknesses starting in 2021. By early 2023, the Fed found more problems. Too late.
Peter Thiel did it.
Nah. Silicon Valley venture capitalists did, however, show up first at SVB’s door wielding pitchforks.
Why was that a problem? A bank takes its depositors’ money and invests it. That's why it may have, say, $4 billion in deposits, but only $2 billion in cash on hand.
The pitchfork-wielders demanded cash, immediately, draining the bank’s liquidity. It was a classic run on a bank. VCs ran the fastest.
Rich people did it.
In a hot-off-the-press hot-take on SVB, four academics lay out in excruciating detail how so-called “sleepy” customers — depositors with less than the FDIC-insured $250,000 in a bank — are much less likely to panic and do what the VCs did: Demand all of their money, immediately. They aren’t the runners. But the high-wealth customers such as those courted by SVB and First Republic are incentivized to run. They have more to lose. Charles Ornstein of ProPublica writes that 94 percent of SVB’s deposits were uninsured.
Crypto would have saved us all.
Nope, nope and no.
Like so much else in life, the inherent allure of crypto is also its inherent weakness: in crypto’s case, a lack of regulation. Banking regulations may be onerous, but there are many, many libertarian-leaning tech bros in Silicon Valley who put money into SVB and are only able to write checks this week because of them.
You can check out the dead coin brigade for yourself, here.
Rising interest rates did it.
They sure didn’t help.
SVB is not the only bank to bet big on investments dependent on low interest rates. However, some financial metrics are entirely predictable: Just like stocks, everyone knows interest rates will go down, and interest rates will go up. Smart banks, like smart Boy Scouts, are prepared. Even smarter scouts hedge their bets.
But what are cautionary tales and long-term planning compared with the addictive sugar rush of artificially low interest rates?
“Markets are like little kids,” said Mohamed A. El-Erian in PBS/Frontline’s just-released “Age of Easy Money,” an examination of the true high cost of cheap money.
“The minute you try to take the candy away,” the markets have a tantrum, said El-Erian, an economist and president of Queens' College, Cambridge.
Diversity did it.
Yes, people are actually saying that a commitment to diversity brought down a multibillion-dollar bank. A Wall Street Journal opinion piece set Twitter’s hair on fire after noting SVB’s board had an LBGTQ+ member, a Black member and two veterans, musing as to whether 12 white men might not have done better.
Well, as one Twitter wag noted, veterans are sometimes white men. So are members of the LGBTQ community.
Besides, the rollback of those bank regulations? Passed by a Congress chock full of white guys. The bill now being introduced to repeal the rollbacks? Introduced by Rep. Katie Porter (D-California) and Sen. Elizabeth Warren (D-Massachusetts).
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