One Guiding Principle For Bank Regulators
I’ve been following the Silicon Valley Bank collapse closely. I told a friend that I feel wonky because I care so much about finance, but after you understand how much it moves the world, you can’t look away.
First of all, this is a slow news cycle, which isn’t helping anybody. For the last week, people were rehashing the same stories but adding the word “crisis.” Yikes.
There are two systemic problems:
1. There are unrecognized losses in the U.S. banking system, because banks – except those governed by too-big-to-fail regulations – don’t have to mark-to-market the bonds they hold. Because of the interest rate increases, bonds have lost a lot of value. The Economist estimated there were $620 billion in those unrecognized losses at the end of 2022. That won’t matter unless other banks get close to the brink, as SVB did for its own peculiar circumstances as the bank of choice for the tech sector, which has been undergoing its own contraction.
2. SVB was a medium-sized bank. Its failure highlighted another systemic problem: the fact that deposits are only insured up to $250,000. That wouldn’t matter so much (most banks are sound) if the U.S. government hadn’t made some banks too big to fail. So, the sensible thinking goes: Why wouldn’t you want your money to be as safe as possible? JP Morgan Chase was a big beneficiary. Some of the winners in this SNAFU were digital banks like Mercury that use a cash sweep system and a combination of banks to offer more insurance, as much as $3 million.
Policymakers may have a knee-jerk reaction: Put tighter regulations on the mid-sized (and presumably small) banks. We know what the effect of careless regulations is: consolidation.
Two-thirds of banking institutions have disappeared since the early 1980s, the number declining from nearly 18,000 in 1984 to less than 5,000 in 2021, according to the National Community Reinvestment Coalition. Rather, I hope regulators see this as an opportunity to make the banking system better for startups and small businesses. Our system needs to comprise different banks, with different owners, different tools and the ability to innovate. (H/T to my co-author, Seth Levine).
This should be a guiding principle for regulators. Finance is a business. If you make it monolithic, you increase the risk.