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.”
vern wuensche says
Dead on again Jim!
Best explanation I have read yet
Dave Richards says
Totally agree. I heard another cogent comment. Because of reckless government fiscal policy, the Fed is having to double down on monetary policy to bring down inflation. This, coupled with Fed mistakes and a lack of adequate individual bank risk management practices, will probably result in additional bank failures.
Brian K Delaney says
True Jim and pretty hard to believe KMPG issued a clean audit two weeks earlier and Goldman apparently gave some pretty clueless advice. Both of them take a big hit on this one. No risk officer for a year and the examiners let it slide/no hedging/diversification of the funding sources when inflation has been around for over a year! There is nothing systemic about either of them/I never even heard of SVB until last week!!
Tony Jernigan says
you are getting smarter with age. 80 is a good age.
Malcolm Gibson says
Instead of giving a thoughtful response to the bank crisis, the best the Whitehouse could do was blame it all on Trump. Pathetic.
Danny Billingsley says
Jim a banking CEO friend in south Texas pretty much gave me the same explanation you did. Additionally, he said his banks deposits were about 85% covered by cash and other liquidities. Given the directors list of SVB and Signature I am confident they’ll both be bailed out. What message does that send to the banking world about regulations? Makes the FTX scandal look tame.
Gregory Stachura says
Confidence in government today is unwarranted. These types of failures occur despite the supposed oversight of government bureaucrats who suffer no consequences when they fail to perform their duties.