But don’t succumb to Yogi Berra Syndrome and declare this déjà vu all over again. This isn’t a replay of 2008. Yes, the problems at SVB initially were characterized as small and contained, redolent of the original attitudes toward subprime mortgages in 2006-08. But this time around, it took the authorities only a day or two, not months or years, to realize that the problem wasn’t well-contained—and to take dramatic actions to prevent contagious financial panic.
Today, every bank deposit in the U.S. is effectively insured by the FDIC. Quite possibly, this is an overreaction. But Fed Chairman Jerome Powell, Treasury Secretary Janet Yellen and FDIC Chairman Martin Gruenberg decided not to gamble that financial markets wouldn’t work themselves up into a panicky lather. Better to do too much (and later pull back) than too little.
The lessons of SVB for bankers are numerous and important; some are yet to come. But I want to concentrate on four lessons for policy makers.
First, many old things go to die in Silicon Valley, and the “too big to fail” doctrine just did. SVB wasn’t too big to fail by any reasonable metric. That old doctrine, which gained prominence with the failure of Continental Illinois in 1984, was mortally wounded by the Bear Stearns episode in 2008. To many observers at the time, Bear didn’t seem too big to fail. Instead, the shotgun marriage by which JP Morgan acquired Bear was rationalized by a new, and then novel, doctrine: “Too interconnected to fail.”
Concern that SVB was too interconnected to fail clearly motivated the authorities to mount a full-fledged rescue operation for its depositors—even though, in this case, the interconnections came more through balance-sheet similarities than through bank-to-bank entanglements. The collapse of Signature Bank 3,000 miles away, and fears that other banks would follow, likely prompted regulators to act with alacrity.
Second, deregulation went too far in 2018, just as many critics warned at the time. To understand what happened then, think back to the Dodd-Frank Act of 2010, the nation’s main “fix” after the financial crisis. Among its many provisions, Dodd-Frank established extra-thorough regulatory supervision (“enhanced prudential standards”) for financial institutions deemed “systemically important.” Which ones were those? In a clear mistake, Dodd-Frank defined systemic importance as starting at $50 billion in assets. That threshold was too low, as I and many others argued at the time.
Now move ahead eight years to the Trump administration and a more deregulation-minded Congress. The $50 billion number in Dodd-Frank was raised all the way to $250 billion—too high in my and many others’ estimation. Care to guess SVB’s asset size last weekend? It was $213 billion. The bank should have been supervised under enhanced prudential standards by the Fed, but it wasn’t.
The third lesson is for the Federal Open Market Committee, which has been fighting inflation (as it should) by taking some of the steam out of the economy (as it has to). Well, the failures of SVB and Signature Bank, the sharp drops in other bank stocks, and the general financial angst will shortly remove some of that steam—and not only in the tech sector. Tougher credit standards, less borrowing and weaker economic activity will likely follow.
It’s way too early to guess how large those reverberations will be. But the direction is clear. Wherever the Fed was thinking short-term interest rates would peak, it should now be thinking lower. Further, the March 21-22 meeting now looks like an excellent time to pause while policy makers assess how much steam is leaking out of the economy.
Last, but certainly not least, people who have minimized the financial consequences of defaulting on the national debt should sit up and take notice. If the prospect that some uninsured depositors in an idiosyncratic California bank would lose money could traumatize the financial world as it just did, try to imagine the market effects of a default on U.S. Treasury debt.
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Source: Policy Lessons From the Silicon Valley Bank Collapse – WSJ