The Collapse of SVB and BOJ Monetary Policy

On March 10, the financial world was shocked as news spread that the 16th largest US bank, Silicon Valley Bank (SVB), was on the verge of failing. The bank’s collapse was the second-largest banking failure of a US bank and the largest since the 2007-2008 financial crisis. Moreover, the event took place against the backdrop of the American authorities closing another bank, Signature Bank, just two days after the collapse of SVB. The banks constituted one to two percent of the United States banking industry.

Why Did the Banks Collapse?

The blame for the collapse of SVB rests on two pillars: the poor risk management of SVB compounded by poor regulatory oversight and the significant increase in interest rates as occasioned by the rapid rise in the policy rate (federal funds rate) by the US Federal Reserve. Furthermore, the preponderance of online banking, smartphones, and social media arguably increased the market’s sensitivity to negative news, which brought SVB to its knees in hours.

What Does This Indicate about BOJ Interest Rate Policy?

It is important to note that the BOJ’s interest rate hikes will not precipitate such a failure of local banks in Jamaica. However, the collapse of SVB is an example of the effectiveness of US monetary policy. BOJ Governor Richard Byles has often called out commercial banks in Jamaica for not increasing the rates paid to depositors: this can be characterized as moral suasion, part of the suite of tools available to central bankers alongside the policy rate. Do some argue that if the US banking sector is efficient, then why did it come close to the edge of contagion? American economist John Cochrane would say nothing about ‘efficiency’ promises ‘stability.’ The market will punish those institutions whose risk management procedures have been sacrificed at the altar of high expected profits.

Are Jamaican Commercial Banks Increasing Interest Rates Commensurate with BOJ Rate Increases?

There seems to be some disparity between the BOJ’s rate hikes and commercial banks increasing their rates in Jamaica. While some may argue that banks have steadily raised interest rates, others complain that the rates are still inadequate. For example, the writer of an email I received in response to my March 1 article in The Gleaner stated, “NCB has raised my rate three times since Mr. Byles mopping up of liquidity to tame the inflation monster. People are feeling it, so please stop saying the [banks have not raised] their rates [because] they have.”

Related Facts

• Silicon Valley Bank’s value as of December 2022 was $209 billion, while Signature Bank’s was $110 billion.
• The collapse of SVB is the second-largest banking failure of a US bank, with the largest being the collapse of Washington Mutual Bank in September 2008
• The market’s sensitivity to negative news has increased due to the preponderance of online banking, smartphones, and social media.
• Moral suasion is part of the suite of tools available to central bankers

Key Takeaway

The collapse of SVB indicates that efficiency does not guarantee stability in the banking sector. Despite the BOJ’s rate hikes, Jamaican commercial banks seem to be struggling to raise interest rates. The collapse of SVB indicates the effectiveness of US monetary policy, while the disparity between the BOJ’s rate hikes and banks increasing their rates in Jamaica is cause for concern.

Conclusion

The collapse of SVB has highlighted the risks involved in the banking sector and the importance of effective regulatory oversight. Jamaican commercial banks must collaborate with BOJ to increase interest rates in line with the rate hikes, and consumers must be vigilant of the financial health of their banks to prevent another banking crisis.