We’re POLITICO econ/finance reporters and a bank regulation expert. Ask us anything about economic politics and policy after Silicon Valley Bank’s shocking collapse.

Submitted by politico t3_11rzth4 in IAmA

PROOF: https://twitter.com/politico/status/1635980729489260545

Just a little more than 72 hours after Silicon Valley Bank suddenly collapsed, rocking the tech industry and igniting fears that the U.S. was on the verge of a financial meltdown, an exhausted group of Biden officials gathered last weekend to put the finishing touches on a hastily composed plan to stave off a nationwide banking crisis.

The sweeping results prevented multimillion-dollar losses for thousands of companies that relied on SVB. But the fallout from the largest bank failure since the 2008 financial crisis is still reverberating. As regulators race to find a buyer willing to take on the bank’s domestic lending portfolio, some major companies are left scrambling to secure new lines of credit. Lobbyists are drawing battle lines as progressives in Congress push for tighter regulations. And Washington is still racing to calm investor fears of instability at other financial institutions.

We’re continuing to report on the fallout. Ask us anything.

More about us:

Victoria Guida is a POLITICO economics reporter covering the Federal Reserve, the Treasury Department and the broader economy. She has spent her Washington career writing about bank regulations, monetary policy and trade negotiations.

Sam Sutton is a POLITICO financial services reporter covering fintech and digital currencies. He’s one of the authors of our Morning Money daily newsletter on finance politics and policy. You can read his recent articles here.

Steven Kelly is an expert on bank regulations, systemic issues, and the like (and one of Victoria and Sam’s favorite Twitter follows). He’s a senior research associate focused on financial crisis management and financial stability at the Yale Program on Financial Stability. You can subscribe to his newsletter Without Warning, here.

EDIT: That's all the time we have for today. Our reporters had to get back to their work, but you can follow some of their latest SVB coverage at politico.com/finance . Thanks for joining and for all of your thoughtful questions!

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ITinMN t1_jcazy67 wrote

>shocking

Was it really all that "shocking"?

Seemed pretty expected something would happen with all the interest rate hikes, no?

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politico OP t1_jcb5l2d wrote

>ITinMN

Hey, Steven here from the Yale Program on Financial Stability! Indeed, financial distress was definitely an expected outcome of the Fed's interest rate hikes. They very explicitly wanted to tighten financial conditions - and banks are huge part of the financial sector. The Fed is (awkwardly?) also in charge of bank supervision - i.e. making sure banks are resilient. And it has a financial stability mandate. It seems the Fed wants tighter financial conditions, but only outside the core banking system

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politico OP t1_jcb7h1s wrote

Sam here: Was talking to Steven about this offline and, as he put it to me, shocking is a point of view. Not to sound like a reporter who was caught flat-footed -- I swear that never happens -- I do think the speed with which this run occurred, and the level of financial sophistication of the industry it most heavily impacted, was fairly shocking. But I definitely defer to Steven on this.

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52-61-64-75 t1_jcbp3o1 wrote

What do you think of what's happening right now with Credit Suisse?

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TylerJWhit t1_jcb2273 wrote

What regulations are being discussed, and what is the probability that any of these regulations will see the light of day?

At this point, what is the likelihood that the SVB collapse is a contagion?

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politico OP t1_jcb6og8 wrote

Great question Tyler, Sam here: At this stage it's extremely unlikely lawmakers would agree on a bill that would lead to any substantial changes --- like Warren and Porter's rollback of the Dodd-Frank rollback -- would make it across the finish line. Not enough Dems support it and it's a divided Congress. On the other hand, there are definitely signs that bank regulators are looking at things like capital requirements and better supervision. On the latter, one of the issues that's been raised is that regulators didn't spot the problems with SVB's investment portfolio/depositor concentration. Fed Vice Chair Michael Barr is overseeing a review of that as we speak.

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[deleted] t1_jcfk0oc wrote

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TylerJWhit t1_jcfpv9f wrote

I don't think you can confidently state that there's no evidence that other banks are at risk. This was caused by increased borrowing rates, and the Fed has given a lot of indication that they'll increase those rates further to stall inflation. That can cause other banks to fail.

The risk is not 0% even if it's low.

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bradland t1_jcb0v7t wrote

Do you think the decision to protect depositors, but not investors, is indicative of a new policy direction, or is this just a one-off due to the nature of SVB's customer composition (an overwhelming number of large-ish employers)?

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politico OP t1_jcb6caq wrote

So, legally the answer to this is, not a new policy. What actually happened is that the Fed, FDIC and Treasury invoked a "systemic risk exception" to the requirement that the FDIC try to minimize losses to its deposit insurance fund. That requires there to be some sort of threat to the financial system or the broader economy. (As an aside, the agencies haven't really laid out their full justification for that, but the central reason seems to have been staving off financial panic).

It might be hard to keep suggesting that every bank poses that kind of risk! And of course, that's not what Congress has said -- the deposit insurance limit is set at $250,000. That said, this could spur a change in deposit insurance law sometime in the future.

But the answer is actually more complicated than that. The Fed also unveiled an emergency lending program that, for the time being, will allow banks to put up the type of collateral that SVB dumped for cash loans that will help them meet withdrawal requests. So for now, the government has basically facilitated banks being able to handle more panicky behavior by depositors (although it depends on whether they have enough of the right type of assets). And that's sort of an indirect backing of depositors for now!

- Victoria

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biospeculator t1_jcb96ay wrote

> The Fed also unveiled an emergency lending program that, for the time being, will allow banks to put up the type of collateral that SVB dumped for cash loans that will help them meet withdrawal requests.

I am a bank & I have an asset with a nominal value of $100. Now underwater at $50. Go to the Fed & trade it for $100. Keep buying the underwater asset class but now I can buy assets worth $200 (nominally). Go to the Fed & trade it for $200 cash / equivalents. Go back to markets & buy $400 worth of underwater assets....

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PeanutSalsa t1_jcb1nas wrote

Why was 1.8 billion dollars in bond losses enough to make the bank insolvent? Where had all the deposits from clients gone to that they couldn't handle the bank run?

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politico OP t1_jcb5sy2 wrote

Hey there, Sam here: It had less to with the losses than it did the depositors' reaction to those losses. Remember this bank was pretty concentrated, venture's a big deal but it's also a little bit of a small world. So when word got out that SVB was taking steps to repair its investment portfolio, depositors -- startup founders, VCs, etc. -- fled en masse. $42B gone in a day -- likely would've been more if CA regulators and FDIC didn't step in. Hard to survive that kind of run.

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revocer t1_jcb336n wrote

There are various economic schools out there, Neoclassical, Keynesian, Chicago, Austrian, and more. How do each view the reason and the solution to SVB?

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politico OP t1_jcb6ugi wrote

I'm not sure any of them have much to say at all! Those schools have strong macro theories, but little to say about financial dynamics and bank balance sheets. This was a lesson we very much learned in 2008 and are still grappling with. - Steven

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revocer t1_jcbeg20 wrote

Would they have something to say about the approaches of government intervention?

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politico OP t1_jcbf0l0 wrote

they have different views about the effectiveness of govt intervention, but again the schools really only speak to macroeconomic interventions

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[deleted] t1_jceqv6g wrote

[removed]

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revocer t1_jcgba15 wrote

This is r/IAmA. In the OP, it said, “Ask Us Anything.”

That’s why.

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[deleted] t1_jcb3eby wrote

[deleted]

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politico OP t1_jcb51l0 wrote

Thanks for joining us! Victoria here. This is a fantastic question. The U.S. has nearly 5,000 banks (and another 5,000 or so credit unions), so that's a lot of competition. Part of what's strange though, is a lot of that is a vestige of when we used to have restrictions on banking across state lines. So consolidation is perhaps understandable.

You don't want too much concentration in the megabanks (think JPMorgan Chase or Bank of America, which each have more than $3T in assets, compared to SVB, which had roughly $200B). And regional banks like SVB are probably better able to compete with those banks than the little guys. But there's certainly room to debate we don't need as many banks as we have now.

- Victoria

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[deleted] t1_jcb4zke wrote

[deleted]

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politico OP t1_jcb6dlc wrote

Liquidity and capital regulations are helpful against general downside banking risks. They can do little if the market bails on your business model. PacWest's business looks very similar to SVB's even if their balance sheet looks stronger. Being a bank to tech/Silicon Valley doesn't look like a viable business model in this interest rate environment - hence the counterparty run. When your counterparties run as a bank, you're out of business. No amount of capital or liquidity can save you.

- Steven

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joeesco34 t1_jcb92e4 wrote

How do you think this alters the FOMC’s plans for tightening? Do you think they have moved too fast, what else might break that they didn’t anticipate?

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politico OP t1_jcb9rz0 wrote

It will definitely be a major factor in how the Fed is thinking about what to do next on interest rates. Inflation is still high -- 6 percent over the past year -- but it's steadily dropped since the middle of last year. That said, it's shown signs the last coupe of months of mostly moving sideways rather than moving convincingly down.

All of that to say, this is a tricky place for the Fed. What we saw with the banks was an example of how rate moves can suddenly hit, with a delay, in unpredictable ways. And so they have to be worried about going too fast and breaking something else. But they might still do a small increase later this month because they're still worried about inflation. It's about risk management at this point.

- Victoria

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politico OP t1_jcbrba3 wrote

Hey all, there was a duplicate post of this AMA, which may be taken down, so we're sharing some of those thoughtful Qs and responses here:

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politico OP t1_jcbrdyz wrote

u/Longjumping-Ease-353: How can financial journalism be improved to prevent future black swan events? Like Enron, theranos, maddoff, SBF, we work, Lehman bros and SVB?

Sam here: Great question. Victoria and I were talking about it offline. On the one hand the Theranos story was a product of tremendous journalism.With that said, a lot of it has to do with building up knowledge around finance, markets, regulation, policy etc. That takes time and commitment to the profession. The other thing to remember is that the media landscape's wider and thinner than it was when there were multiple daily papers competing for the same market. Markets are much larger, but journalism's shrunk. Time and investment is the only way that improves.

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politico OP t1_jcbrr6f wrote

u/boazg: Are we expecting a chain reaction of more banks collapsing due to the global nature of panic these days?

The Fed has intervened to insulate open banks against liquidity concerns related to the open banks. Preventing a contagion likely played a role in invoking these systemic risk authorities for banks that are otherwise not central to the financial system. Crisis-fighters largely lost their authorities after the 2008 financial crisis to protect individual banks from contagion without first closing them. So, responding so forcefully to these relatively insignificant banks' failures so forcefully hopefully limits contagion to any banks that may actually be more prone to spreading financial wildfire.
the other thing worth noting is that this has primarily been a run on one kind of business model: banking tech/VC/Silicon Valley - which itself is facing belt-tightening as the Fed has raised interest rates steeply. We have not seen signs of contagion large, diversified banks - which are actually experiencing deposit inflows. — Steven

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politico OP t1_jcbs2ef wrote

u/SockPuppetsUnite45: Does this mark the beginning of the end for bank deregulation legislation that is framed as 'right sized or tailored regulation'?

Unlikely. Tailoring as a broad and general concept is something that seems pretty logical: a community bank with less than $1 billion in assets and does mostly just basic lending shouldn't face the same type of regulations as a megabank with $3 trillion in assets. How exactly that all shakes out is very complicated (and, as you implicitly suggest, offers a lot of room for mischief). But certainly, this has likely made both lawmakers and regulators much less sympathetic to arguments from banks, say, between $100 billion and $250 billion in size, that they don't pose risks to the economy. — Victoria

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politico OP t1_jcbsf16 wrote

u/jh937hfiu3hrhv9: What are SVB's assets? Does the depositer's refund come from bank reserves or the FDIC?

SVB's assets are largely longer-term Treasuries and government-backed mortgage securities. These securities have little risk of loss if they're held to maturity, but they lost paper value as interest rates increased - so when SVB lost deposits and had to sell assets, they had to bear those losses.
While depositors have immediate access to their funds—which may needed to be funded in the short-term by the FDIC—the FDIC will only lose money if its sale of the assets (and/or liabilities) of SVB is less than enough to cover all the depositors. And, if the FDIC's insurance fund dips below what it determines to be sufficient coverage for the system - it will levy the banking system for the shortcoming. — Steven

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Seattle2017 t1_jcc3qc0 wrote

What should SVB have done with interest rates started to go up? They had a lot of long term bonds then with lower interest rates, and they apparently had that surge of deposits, partly leading to them loading up with long term bonds. If they immediately sold some of the old ones, they'd have had some of the losses that sank them. They didn't know how far it was going to go on interest rates (each one adding to their potential threat). The strategy that would have worked better in retrospect would be buy more shorter term bonds, fewer longer term bonds - but then they'd have lower returns (as longer term bonds pay better). Was this an obvious problem they should have dealt with earlier, or was it impossible to foresee?

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DestinTheLion t1_jccf2wu wrote

Is there a large difference vis a vis inflation between the fed releasing money that had been saved and was not to be touched, versus printing money and giving it to them?

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MajorData t1_jccqaoo wrote

If you are still taking questions... How are the SC bank crises in Europe connected to the SVB run?

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JimW t1_jcetugn wrote

The insurance amount is supposed to be limited to $250K. Why was there not a deduction of let's say 5 or even 10% of the uninsured deposits?

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Maximum-Top445 t1_jcj4mnx wrote

From what I understand, after selling everything SVB was around 1billion in the red. I get this implies the bank had to go under and the process of liquidating all assets takes time (that's why the gov't provided the liquidity for their customers), but when all is said and done won't the fed only be losing about a billion dollars down the line (provided the bonds don't recover and everybody stays generally calm)?

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