reichlin29_David L. RyanThe Boston Globe via Getty Images_svb David L. Ryan/The Boston Globe via Getty Images

Lessons from the SVB Collapse

Although Silicon Valley Bank was not deemed to be systemically important, its insolvency forced the US Federal Reserve to head off systemic contagion and exposed the inadequacy of the FDIC’s partial deposit insurance regime. The financial-stability framework adopted after the 2008 crisis obviously needs another overhaul.

LONDON – Does Silicon Valley Bank’s collapse reveal a fundamental weakness in the current financial-stability framework, or does it merely point to a localized failure of supervision?

By jeopardizing many prominent, high-growth companies in the tech sector, the bank’s failure certainly put significant political pressure on the US Federal Reserve. But the Fed’s emergency weekend intervention – when it provided a comprehensive deposit guarantee and extended loans to other banks, valuing their collateral of US Treasury bonds at par – suggests that it was genuinely concerned about financial contagion, too. And now, the recent scare around Credit Suisse has forced European banking regulators to mull the same questions.

Obviously, there was a failure of supervision. SVB’s insolvency came about because of its entirely foreseeable exposure to rising interest rates. It had used customer deposits to fund investments in a portfolio of US Treasuries that were poised to decline in value when the Fed started tightening its monetary policy a year ago. The problem was neither credit risk nor liquidity risk; rather, it was an obvious form of market risk. The Fed’s usual stress tests might have spared supervisors the embarrassment, except that SVB was exempted from this requirement, owing to a 2018 legislative change that increased the threshold for participation from $50 billion in assets to $250 billion. SVB had $209 billion in assets when it failed.

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