Haas Faculty Uncover Alarming Systemic Weaknesses in Banking after SVB Failure
After SVB Failure, Haas Faculty Raise Concerns about Systemic Weaknesses in Banking
The stunning collapse of Silicon Valley Bank (SVB) has sent ripples through the banking industry, and experts are questioning whether broader troubles may be brewing. Professors from the Haas School of Business at the University of California, Berkeley, have weighed in on the matter, and their conclusions are concerning.
Where the System Broke Down
The Haas experts agree that SVB’s problems were “banking 101” and that its management and board failed in their fiduciary duties. Professor Ross Levine, a highly regarded banking industry expert, believes the situation “suggests stunningly incompetent bank supervision and regulation” and cited research that Silicon Valley Bank may be “the tip of a gigantic iceberg.” Professor Panos Patatoukas agreed, asking, “If (regulators) cannot spot something as straightforward as SVB’s issues, then what else are they missing?”
The Faulty Supervision and Regulation of Banking
According to Professor Levine, SVB failed because it had long-term assets, including Treasury and other U.S. government-backed securities, and short-term liabilities, namely deposits. This left SVB exposed to interest rate risk because long-term securities are much more sensitive to interest rate changes than deposits. As interest rates went up over the last year, the price of long-term securities went down, challenging SVB’s solvency.
The professor states that regulators at the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) did not need sophisticated supervisory and regulatory skills or elaborate training to recognize such interest rate risk. It is banking 101. He asks whether the regulators have failed to address the most basic risks in other banks and whether they have effectively addressed the more complex risks some banks take. He also questions whether regulators allowed systemic risks to grow in the U.S. banking system.
Recent research raises more alarm, indicating that the market value of U.S. banking assets is about 2 trillion dollars less than the reported book value due to increases in interest rates over the past year. To what extent banks used derivatives to hedge interest rate risk is impossible. Thus, one cannot conclude definitively that the U.S. banking system experienced a loss of $2 trillion. Nevertheless, in conjunction with the details on SVB, these statistics are cause for concern.
- SVB had a market value of $1.98 trillion in early March but has now declared bankruptcy.
- SVB’s collapse is the largest banking failure since the 2008 financial crisis.
- The FDIC has announced that it will pay insured depositors at SVB approximately $1.95 billion.
- Several Silicon Valley startups, including firms associated with autonomous driving and artificial intelligence, had accounts with SVB.
The Haas experts’ opinions highlight the disturbing possibility that the failure of Silicon Valley Bank was not an isolated event but rather a symptom of wider systemic weaknesses in banking that have gone undetected. The potential loss of $2 trillion suggests that regulators and policymakers need to re-examine and improve the supervision and regulation of banks in the United States.
The Haas experts are worried about the state of the U.S. banking system. They believe the SVB collapse is a severe warning that current regulatory authorities may not be doing enough to protect the banking industry and, by extension, the wider economy. With $2 trillion at stake, rectifying any shortcomings in regulatory supervision and regulation is essential.