The Dallas Morning News
Bank’s Fall Is a Cautionary Tale
There are many lessons in the collapse of Silicon Valley Bank
The light-speed failure of Silicon Valley Bank is a major cautionary tale about the power of social media, ill-placed bets on the wrong side of interest rates and monetary policy.
In a matter of days, the powerful technology lender that grew into prominence by funding startups when major money center banks would not went from solvent to out of business as reports circulated on social media that the bank was in financial trouble. Unlike in other bank crises, venture capitalists who fund tech startups and much of the technology ecosphere were the bank’s wellheeled depositors who spread the word via social media in a world that is always connected. And when depositors demanded their money, the bank sold assets and realized massive losses.
While this bank failure is different, it’s not necessarily less problematic than previous bank failures. The federal government wisely moved quickly over the weekend to reassure depositors and avert spreading uncertainty to the rest of the banking sector.
Most depositors don’t have more than the $250,000 federally insured limit in a bank, and most banks aren’t so tied to a single industry as Silicon Valley Bank. In fact, most Americans don’t have more than a paycheck or two in a bank account, a separate vulnerability. Nonetheless, in a world of rumor and speculation, uncertainty is deadly.
It is too early to know for sure whether actions over the weekend have adequately reassured financial markets or whether this failure, the biggest banking collapse since the global financial crisis in 2008, is the canary in the coal mine for a broader financial earthquake.
This time, the federal government’s response protected depositors, who needed assurances that their companies could make payrolls, and wiped out shareholders, bondholders and bank management. In contrast, a massive global liquidity crunch and hidden contingent liabilities prompted the federal government during the 2008 financial crisis to use taxpayer dollars to stabilize its financial system. Banks were cratering under ill-advised high-risk mortgages and increasing lack of confidence in the safety and transparency of financial markets.
Over time, more lessons will emerge from Silicon Valley Bank’s failure than what is evident right now. Social media accelerated fear and uncertainty among the bank’s customers, a reality that bank managers must better understand. The management team at Silicon Valley Bank also broke a cardinal rule by failing to diversify and making the institution extremely vulnerable to a single industry.
They compounded that mistake with investments in bonds, which went south when the Federal Reserve hiked interest rates to reduce inflation. More broadly, the collapse should cause some soul-searching at the Federal Reserve about the risks of higher interest rates.
The Fed had to hike interest rates to deal with today’s inflation. However, this bank collapse should force the Fed to reconsider the limits of monetary policy and cause the Biden administration to realize that massive fiscal spending in the new budget proposal is not doing any favors in the inflation fight.