As a veteran, or one might say refugee, of the Texas banking crisis of the 1980s as CEO of a Houston bank holding company, I can identify with the issues raised by the collapse of the Silicon Valley and Signature Banks and the response by the regulatory agencies. I won’t attempt to analyze the technicalities of the particular problems that caused these failures. And suffice to say that the current failures and the historical Texas problem are different. The problem in Texas was a complete collapse of asset values, primarily oil & gas and commercial real estate, exacerbated by the lack of diversification of funding sources and asset mix due to the then antiquated Texas branching and interstate banking prohibition. Funding the banks was not a particular problem as long as depositors stayed within the FDIC-insured limit of $100,000. In the present case, there has obviously been egregious mismanagement of interest rate risk–funding long term assets, primarily loans and long-term securities, with short term liabilities, primarily customer deposits, with total disregard for the risks of the Federal Reserve raising rates to fight inflation. This is a classic violation of a basic principle and these banks, their regulators and auditors, and the Fed seemed to be clueless. And of course total fiscal irresponsibility led to the inflation problem in the first place.
But despite the mismanagement here, we will almost certainly declare Silicon and Signature as “too big to fail” under the FDIC’s “systemic risk” exception and provide insurance coverage for all depositors, even those beyond the $250,000 limit, a bailout that will add significantly to the moral hazard and incentivize more such risky behavior.
What brought us to this point? The Wall Street Journal editorial board said it best: “You can’t run the most reckless monetary and fiscal experiment in history without the bill eventually coming due. The first invoice arrived with inflation. The second has come as a financial panic, with economic damage that may not end with Silicon Valley Bank.”