Silicon Valley Bank failed, which is a big problem caused by the financial crisis of 2008. It's the second-largest bank failure in the USA. This made people think about how banks should work well by having enough money, being safe, and making a profit.
The bank's failure showed that the way people decide how risky things are and how much money they will make is not very good. The people who are supposed to check how safe the bank is didn't do a good job, which means they need to be more careful. This is like what happened in 2008, but even though people said they would make changes to stop it happening again, they didn't do it.
The bank failure makes us think about all the problems that caused it, like things that were not seen or not given enough importance. These problems include things like the way money was used over many years, the things people did to stop the COVID-19 virus, and how people used too much money. There were also problems because some people made decisions that weren't good for democracy.
The bank that failed was called SVB, and it was quite big with lots of money. More than half of its money was used for things that would not give it back quickly, and it was also involved with new tech and health companies in Silicon Valley. Between 2019 and 2022, the bank's money grew a lot.
On Thursday, March 8, a lot of people took their money out of the bank. In just one day, $42 billion was taken out. This was because the bank was losing money and people weren't sure if it was still safe. The bank only had a small amount of money that people didn't earn interest on, and it was paying more than other banks to people who earned interest.
The bank tried to fix things by selling some of its investments, which caused it to lose $1.8 billion. Then, it tried to get more money by asking people to invest in it, but this didn't work. The bank was closed by the FDIC on Friday, March 9.
People had a lot of questions about why this happened and what could have been done to prevent it. Here are some of the questions people are asking:
''The Fed Reserve bank has more than $8.3 Tr in assets left, so how can they take away extra money without causing more problems with bond prices and not enough money? They tried to fix things after the 2008 Financial crisis by using policies like Quantitative Easing and ZIRP, which made interest rates very low. They kept using these policies when the Covid pandemic happened. But when there was too much inflation, they changed things and raised interest rates eight times in a row. This made it hard for startup companies to get money, so they had to take more money out of their bank accounts. It also meant the bank lost money on some investments. All of this made it worse for the SVB bank. Can people who check if banks are safe do a good job of making sure things are okay now?''
'When will the groups in charge of making sure there is no unfair business work with the bank to stop prices from getting too high? Just raising interest rates won't do enough. Right now, the way interest rates work isn't good enough. We need to also use rules to make sure one company can't control a whole market and raise prices too much. This will make sure everyone has to share the burden when it comes to interest rates. Are some people not wanting to make these rules because of a decision from the Citizen United court case?'
'Why didn't the FDIC take action when SVB's Common Equity Tier 1, which shows how strong a bank's capital is, became very weak because of losses on its securities? This happened at the end of 2022, but the FDIC didn't do anything. The bank had losses of $17 billion on the securities it planned to hold until they matured.'
'Why did the FDIC let SVB invest $91 billion of its deposits in long-term securities like mortgage bonds and treasuries without taking steps to manage the risks involved? It seems like they didn't use interest rate derivatives to reduce the amount of risk or manage it properly, especially with mortgage-backed securities.'
Why didn't the FDIC take action when SVB revealed that 96% of their deposits weren't insured at the end of 2021, most of which were more than $250,000? Also, why didn't they intervene when SVB parked $91 billion of deposits in long-term securities without proper management measures? Additionally, who oversaw the efforts to recapitalize the bank on March 8 and 9? Why did the bank have to sell most of its securities portfolio, causing a $1.8 billion loss, instead of using the discount window to repo the portfolio until the $2.5 billion capital increase was completed?
There were reports that some top executives of the bank made trades in the bank's securities earlier in the year. These trades are known as "insider trading" because they involve buying or selling securities based on non-public information. It's unclear why the bank didn't enforce a "blackout period," which would have prevented insiders from trading during a time of financial uncertainty. Regulators may review the transactions to ensure that they were made at arm's length and not based on inside information.
It is indeed a valid question whether regulatory provisions regarding solvency and prudential liquidity management for regional banks need to be revisited or enhanced, given the collapse of a bank as large as SVB. The fact that SVB was able to operate under the $250 billion threshold, despite being the 16th largest bank in the US, highlights the need for a closer examination of the regulatory framework. Furthermore, the triumphant rebuke against more stringent solvency and prudential liquidity measures in 2015, as well as the CEO's submission that the applicable threshold of $50 billion was too low, raises questions about whether regulatory bodies need to be more vigilant and proactive in implementing stricter measures, even if it means challenging powerful banks.
It is important to note that credit rating agencies are not responsible for ensuring the financial health or viability of the institutions they rate. Their ratings are intended to provide investors with an opinion on the likelihood of the institution defaulting on its obligations, based on various factors such as financial strength, management quality, and market conditions.
However, it is also true that credit rating agencies play a crucial role in providing investors with reliable and accurate information, and their ratings can have a significant impact on an institution's reputation and access to funding. Therefore, it is important to ensure that rating agencies adhere to high standards of accuracy and transparency in their methodologies and practices.
The SEC's Office of Credit Ratings is responsible for overseeing and regulating credit rating agencies to ensure they comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandates a number of reforms to enhance the integrity, transparency, and accountability of credit rating agencies. The office monitors rating agencies' compliance with various rules and regulations, including the requirement to disclose their methodologies, conflicts of interest, and internal controls.
In cases where rating agencies are found to have violated regulations or standards, the SEC can impose penalties and sanctions, including fines, suspensions, and revocations of registration. The SEC can also refer cases to other authorities, such as the Department of Justice, for further investigation and prosecution.
As for the specific case of SVB Financial and the rating agencies, it is not clear at this point what actions, if any, the SEC's Office of Credit Ratings will take. However, it is likely that the agency will conduct a review of the rating agencies' actions and methodologies to ensure they complied with applicable regulations and standards, and to identify any areas where improvements can be made to enhance investor protection.
The potential domino effect of the SVB fallout on the wider economy and financial system depends on the extent of credit risk and interest rate risk exposure and how well it is managed. If other banks or financial institutions have significant exposure to similar risk factors and are not able to manage them effectively, it could lead to a contagion effect that could spread throughout the financial system, potentially causing a systemic crisis.
The fallout could have a significant impact on the tech start-up world, Silicon Valley, and smaller regional banks, as SVB was a significant player in these areas. The loss of SVB could also have broader implications for California state and the US economy, as the bank was an important contributor to the financial system and played a role in financing innovation and growth in key industries.
The acquirer of SVB is currently unknown, and it could be a domestic or foreign entity. If it is a foreign entity, it could raise concerns about further banking concentration and potential loss of diversification in the US financial system.
The resolve and resolutions of the coming weeks will be critical in determining the impact of the SVB fallout on the wider financial system and the US economy. The crisis has highlighted the need for regulators to review and enhance their provisions regarding solvency, prudential liquidity management, and rating agency oversight to prevent similar events from happening in the future.
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