Why didn’t US regulators predict the SVB crash? – 03/15/2023 – Market
American regulators failed to detect the warning signs that would allow them to act before the spectacular bankruptcy of Silicon Valley Bank (SVB), in an environment of laws that are too permissive, say several analysts.
The Federal Reserve (Fed, central bank of the United States) announced on Monday that it will conduct “an in-depth, transparent and expeditious analysis” of the circumstances surrounding the SVB’s demise. The results of the report will be published on May 1st.
How could the 16th largest US bank by assets, which authorities closed down on Friday, collapse so quickly and drag Signature Bank down with it on Sunday?
The crash “underscores the inadequacies of the regulatory reforms undertaken” after the 2007-2009 financial crisis, says Arthur Wilmarth of George Washington University.
Several elements should worry regulators, starting with the fact that the bank was too focused on a few high-risk clients —startups and venture capital investors—, just as other companies have wrongly done in the past with the real estate sector or with loans to emerging countries, he explains.
Other red flags should be SVB’s rapid growth between 2020 and 2022, its exposure to long-term bonds at low rates at a time when interest rates were rising rapidly, and the fact that most of its accounts had balances in excess of US$ 250 thousand (about R$ 1.3 million) guaranteed by the authorities.
“It’s a surefire combination for failure if the economy does poorly,” Wilmarth says. “Regulators couldn’t ignore that.”
Several observers point to the easing of the American Dodd-Frank law adopted after the 2007-2009 crisis, which obliged all companies with more than US$ 50 billion (R$ 262.5 billion) in assets to regularly present a liquidation scenario.
In 2018, during Donald Trump’s term, this limit rose to US$ 250 billion (R$ 1.3 trillion), effectively making the norm more flexible.
“When regulatory requirements are relaxed […]this puts much more pressure on regulators as they don’t have access to the warning signs” detectable in automatic controls, points out Anna Gelpern of Georgetown University.
But “this does not exempt them from what appears to be a failure of supervision” on the part of those who must ensure the “safe and reliable” management of all banks.
Regulation was also inadequate in the particular case of SVB, estimates Michael Ohlrogge of New York University.
The fact that investments in state-backed bonds are considered “nearly risk-free when it comes to calculating capitalization requirements” has translated into SVB being able to “make big bets on [esses produtos] without any support mattress”, he says.
When it comes to assessing banks’ resilience, regulators assume that customers of a company with more than $250,000 in deposits won’t suddenly run away “if they do business with the bank,” says Ohlrogge.
But with SVB customers looking to withdraw tens of billions of dollars as soon as the first signs of trouble appear, “that assumption will certainly have to be revised,” he says.
For Henry Hu, from the University of Texas, the authorities found themselves this weekend facing “a dilemma” in responding to the crisis.
If the Fed had not guaranteed repayment of all SVB and Signature Bank deposits, many companies would have withdrawn their money from regional banks and deposited it in banks considered “too big to fail”.
“[Mas] if we think that regulators cover all uninsured deposits, moral hazard arises. Some companies may neglect supervision of the banks they deal with, convinced their deposits are safe no matter what happens.”