Banking needs to be regulated, but not in the ways you think 

The Silicon Valley Bank failure was more than predictable. The bank’s history is marked with a plethora of warning signs and foreshadowing of the events that transpired in Silicon Valley. Illustration by Sarah Chantres/The Daily Campus.

The Silicon Valley Bank failure was more than predictable. The bank’s history is marked with a plethora of warning signs and foreshadowing of the events that transpired in Silicon Valley. Obviously, our banking industry has systemic and broad faults that provoke repeating blunders by regulators and auditors, so what exactly went wrong in Silicon Valley? 

Most embarrassingly, the cause doesn’t root in complex debt structures or asset derivatives, but misnomerized “safe” Treasury bonds and mortgage securities. Dating back to 2008 in Basel III, Treasuries and securities became standard as a buffer against financial crisis. However, the risk from interest rates has long been underplayed through the Fed’s “regulatory policies and their loquacious forward guidance concerning monetary policy. Their promises to suppress interest rates to abnormally low levels for extended periods encouraged banks and others to believe sovereign bonds would hold their market value”, says the Wall Street Journal Editorial Board.  

Regulation is lacking within the banking industry, however this is not necessarily a failure originating at any particular institution. Rather, the conditions for the SVB crisis roots itself in widespread and systemic failures that lead to this motif of bank failures in the American economy — regulators in California, the Federal Reserve Bank in San Francisco, the Federal deposit Insurance Corporation, regional bank presidents, bank examiners and mismanagement at SVB all contributed to SVB’s demise and were unable to prevent yet another financial defeat every step along the way. 

It is worth noting the unfounded theories as to why SVB collapsed, like the Trump administration’s changes to the Dodd-Frank Act of 2010. In reality the bank would have passed the liquidity-coverage test before the changes, making the previous administration not a factor to the situation. As well, the various theories about inclusive hiring within SVB do not hold, as the real reasons for the bank’s failure were clearly founded in financial issues. 

SVB’s poor decisions last year should have put the bank under close supervision, when it had no chief risk officer for a majority of the year. The bank had overinvested in long term Treasury bonds with low interest rates, only for them to continue to lose value when interest rates shot up. The deposit base was shrinking, and the purchasing of Treasury bonds with the bank’s cloudy future had signaled its demise well before this catastrophe. Furthermore, accounting rules don’t require reporting of losses in assets if they are going to be held until the asset maturity, a large assumption when dealing with bonds and functioned as a large asset base for SVB. We can see many other instances of poor banking decisions, like the $5 billion investment into an environmental program: an amount equal to the bank’s average yearly profit. Regional bank supervision clearly was not able to detect the poor banking operation in SVB especially when the Treasury interest rose, and it’s hard to say exactly why the bank went largely unnoticed until it was too late.  

These financial nuances will always go unnoticed to policy makers. Bad monetary policies will most likely be present as long as Capitol Hill is appeased with superficial rules applied to banks to boost confidence in the realistically weak regulatory policy present. 

Our regulation is designed to only observe credit risks, a much easier element of the balance sheet to keep track of, and far easier for bureaucrats and lawyers to understand. However, our regulation lacks the scope of long-term investing and risk management that is only tangible to those trained for it. Passing more laws won’t necessarily solve the problem, but a reformed supervising and auditing system more versed in financial concepts to understand the risks a bank undertakes may help. The banking issues we face have been pervasive for far too long and will continue to return without a proper treatment to the diseased banking system. 

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