Set for a grilling before Congress at 10:00 AM Eastern Time, a written testimony from Greg Becker, former CEO of the now-seized Silicon Valley Bank (SVB) calls the two-day collapse of his bank “unprecedented”.
However, it also highlights some realities that anyone familiar with the financial system in America, or how a theoretical financial system should work, should recognize as intolerable.
On March 7th, the Santa Clara-based SVB was the 16th-largest lender in the country, but after a loss on its bond portfolio coupled with comparisons made between it and a cryptocurrency-focused lender known as Silvergate that had recently collapsed, it took just 48 hours for the bank’s depositors to almost entirely jump ship.
SVB was seized by the Feds, and Greg Becker was fired. But he believes the bank was the victim of outside forces, particularly those on social media who inspired the panic, and among regulators.
“By the end of the day on March 9, $42 billion in deposits were withdrawn from SVB in 10 hours, or roughly $1 million every second,” Becker writes. “I do not believe that any bank could survive a bank run of that velocity and magnitude, which was ‘far beyond historical precedents,’” he writes, quoting a Federal Reserve report about the fall of SVB.
If he has evidence to support his claims, Becker’s finger-pointing at financial regulators and the Federal Reserve is likely entirely justified.
News reports, including those from the BBC and CNN say that the scheduled Congressional testimony is supposed to help see if more regulation could potentially prevent such catastrophic bank runs in the future, but the chief regulator of American banks (the Federal Reserve) set reserve requirements at 0% for the first time in history just 3 years ago.
Also during that time, interest rates were set by the Federal Reserve at 0% to 0.5%, while Chairman Jerome Powell called the steadily rising inflation “transitory”. Whatever optional reserves banks chose to hold, the only way they were able to gain any interest was in the longest duration US Treasury Bills, such as those needing 30 years to mature, which were ultimately the cause of SVB’s demise.
According to Becker, as SVB grew in size and financial strength, additional regulations were applied to them, and more cooperation with regulators was required.
“During this time, the feedback from regulators was that SVB had sufficient capital and liquidity,” Becker wrote in his testimony. If this is true, then the regulators would have seen the bank’s portfolio of mostly-long bonds and said it was acceptable as recently as 2022.
Then, in the second half of the pandemic, Powell admitted after a year of using the word “transitory” that inflation was not, in fact, transitory. Becker explains that his maintenance of long-duration treasuries, which lose value as interest rates rise, was based on Powell’s transitory predictions during 2021.
In fact, this was the strategy of many bond portfolio planners—to trust the most powerful banker in the country that inflation would drop as soon as the majority of the world economy resumed normal activity. As a result, bond portfolios had the worst performance in several hundred years during 2022.
Then, throwing more than a year of transitory rhetoric out of the window, the Federal Reserve embarked upon the most aggressive interest rate increases in 40 years, tanking over a billion dollars from SVB’s bond portfolio in a matter of months. It was the mark-to-market loss of that $1.2 billion that spooked certain large depositors who ignored SVB’s announcement that they were looking to raise an additional $2.25 billion in capital to cover the loss, and set off the bank run (or so Becker claims) which ultimately undid the bank.
A report on the collapse prepared by the Federal Reserve said SVB’s failure was due to a “textbook case of mismanagement,” and many analysts and politicians have blamed Becker and the board for relying too much on venture capital loans to tech firms, and for not adjusting its bond portfolio to the rising interest rates.
If his testimony is truthful however, his mismanagement from a macro scale is almost entirely because he followed the Fed’s guidance. Yes, there was no doubt a significant amount of unrecoverable capital from loans made to tech startups that would never have a positive bottom line, and this may well have led to the bank’s default in years to come. However this wasn’t the reason SVB was placed in receivership.
Financial atheists might point out that the Fed has been wrong before, but suggesting that bank boardrooms can’t follow the advice, guidance, or policies of the central bank and other regulating bodies, with the consequences being a loss of $142 billion in panicky depositers’ money in 48 hours, also suggests a massive issue with that central bank, and those regulators. WaL