Banks usually fail due to greed, incompetence, or both. After a significant banking failure, politicians and regulators solemnly promise to tighten regulation. They promise stricter oversight to ensure that depositors and taxpayers are not left to pick up the pieces after a bank’s management, or the regulators, fail to prevent a crisis.

The US has a fragmented banking system with nearly 5,000 banks. Silicon Valley Bank (SVB) is one of the largest regional banks specialising in financing the tech sectors, especially high-tech start-ups and healthcare companies that provide thousands of jobs in the US and Europe. Its failure will go down in history as the second-biggest US banking failure on record.

As invariably happens when a bank fails, the popular media goes into a frenzy. The blame game takes over, pushing to the side a clinical risk analysis of the more mainstream media. This time, there seems to be a consensus that greed was not behind the SVB debacle.

An employee of the bank who requested anonymity to speak openly told CNN that the bank’s CEO was naïve when he publicly acknowledged the extent of the bank’s financial troubles without first trying to find a solution.

He said: “That was absolutely idiotic. They were being very transparent. It’s the opposite of what you normally see in a scandal. But their transparency and forth­rightness did them in.”

The Financial Times reporting is more revealing in what was wrong with the SVB business model. Every bank must manage the main risks related to liquidity, interest and credit risks. Some banks face a deadly combination of incendiary elements that could potentially burn a big hole in their balance sheets: volatile deposits, high interest rates on their asset side and insufficient hedges.

As invariably happens when a bank fails, the popular media goes into a frenzy

In a decade of extraordinarily low interest rates, SVB, like many other European and US banks, invested much of its swollen base of deposits, primarily repayable on demand, into long-term, held-to-maturity bonds portfolios, especially in sovereign debt. When the Federal Reserve started to raise interest rates sharply, long-dated corporate and sovereign debt values fell drastically.

Moreover, the unwinding of the central banks’ bond-buying programmes in the last few years happened faster in the US than in Europe. The result was that SVB saw the value of its bond portfolio plummet while its borrowing customers were finding it more challenging to repay their loans as the impact of rising interest rates hit their liquidity.

The popular belief that investment grade sovereign bonds are practically risk-free is a fallacy. Sheila Bair, who led the US Federal Deposit Insurance Corporation during the 2008 financial crisis, argues that banks need to look not just at the quality of their assets, like loans, but also at their liabilities, adding: “institutional money seeking higher yield is not stable”.

Every banking crisis is made worse by the panic of depositors. SVB held large deposits of tech companies spooked by rumours and somewhat speculative reporting by some market analysts.

The SVB collapse may have been accelerated by a newsletter authored by Bryne Hobart, a tech expert in Texas, in the last week of February. In his niche newsletter, which tech companies widely follow in the US, Hobart said that SVB had a debt-to-asset ratio of 185:1, and that it was “technically insolvent” in the last quarter of 2022. No wonder this must have spooked SVB depositors, who rushed to the bank to withdraw their deposits.

Despite bank share prices being rattled, analysts agree that the risk of contagion from the SVB collapse to other major banks in Europe and the US is not high. In the Financial Times, Jerome Legras, head of research at Axiom Alternative Investments, wrote that European banks, scarred by losses during the eurozone crisis, have learned the hard way that there is no free lunch to be gained from a strategy based on buying long-term bonds.

Some banks and insurance companies may be overinvested in long-term bonds that suffer when interest rates rise. Their asset and liability management committees must continuously assess the interest rate risks on their balance sheet to prevent SVB-type failures.

US Senator Elizabeth Warren is right when she argues that regulatory oversight needs to be strengthened and measures are taken to reduce bank reliance on debt. She tweeted: “SVB’s collapse underscores the need for strong rules to protect the financial system. Regulators must not buckle under pressure."

Banks might launch another lobbying onslaught to resist stricter capital requirements. One can only hope regulators will not be intimidated by the industry’s clout with politicians.

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