by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Paul Kupiec writes at The Hill about an important lesson emerging from recent high-profile bank failures.
While President Biden calls for tougher bank regulation, what the country really needs is competent bank regulators, or at least regulators that are not asleep on the job.
Both Silicon Valley Bank (SVB) and Signature Bank both grew like crazy in the past few years. According to an FDIC discussion of its early warning models, the first sign of a problem bank is often rapid growth funded by a volatile lending source, like uninsured deposits. Other signs include a concentration in bank business or loan categories and growth fueled by a new activity.
The FDIC’s description of a potentially troublesome bank fit both SVB and Signature Bank to a “t” and yet none of the regulators seemed to pay any attention to either bank. It does not appear that either bank made the FDIC’s problem bank list, and neither bank appears to have earned a significant “matters acquiring attention” notice from their regulator.
To add a bit of irony, SVB’s CEO was a director of the Federal Reserve Bank of San Francisco and former Rep. Barney Frank (D-Mass.) — the coauthor of the famed Dodd-Frank Act — was a director of Signature Bank. Apparently knowledge of basic banking skills was not the talent that landed either of them in the board room.
Both institutions failed as a consequence of an old-fashioned bank run. They could not satisfy customer withdrawal demands. They did not have enough liquid assets or enough eligible collateral to borrow from the San Francisco Home Loan Bank or the Federal Reserve Bank of San Francisco.
At least in the case of SVB, maturity mismatch was a major causal factor for the bank run. SVB had a large unrealized mark-to-market loss on its securities holdings and mortgage loans that were not required to be reflected in its regulatory capital calculation. Once you valued SVB’s assets at current market rates the bank was arguably insolvent.