{"id":1032645,"date":"2023-03-21T12:28:48","date_gmt":"2023-03-21T12:28:48","guid":{"rendered":"https:\/\/jacobin.com\/2023\/03\/federal-regulators-silicon-valley-bank-collapse-uninsured-deposits\/"},"modified":"2023-03-21T12:30:06","modified_gmt":"2023-03-21T12:30:06","slug":"federal-regulators-ignored-warning-signs-at-silicon-valley-bank-years-before-its-collapse","status":"publish","type":"post","link":"https:\/\/radiofree.asia\/2023\/03\/21\/federal-regulators-ignored-warning-signs-at-silicon-valley-bank-years-before-its-collapse\/","title":{"rendered":"Federal Regulators Ignored Warning Signs at Silicon Valley Bank Years Before Its Collapse"},"content":{"rendered":"\n \n\n\n\n

Five years before customers fled Silicon Valley Bank en masse, federal regulators acknowledged that the nature of the bank\u2019s deposits made it especially susceptible to such bank runs \u2014 but did nothing to reduce the risk.<\/h3>\n\n\n
\n \n
\n A man passes a sign Silicon Valley Banks headquarters in Santa Clara, California, on March 13, 2023. (Noah Berger \/ AFP via Getty Images)\n <\/figcaption> \n<\/figure>\n\n\n\n\n \n

As lawmakers look for clues about the corporate and regulatory failures at the root of the current bank crisis, a little-noticed report from the government\u2019s top regulators could be one of the smoking guns. It shows that years before customers tried to flee Silicon Valley Bank (SVB) en masse, leading to its collapse, regulators knew that the nature of the bank\u2019s deposits made it especially susceptible to such bank runs.<\/p>\n

And yet despite that risk, no evidence has surfaced showing regulators did anything to reduce it. Instead, the Federal Reserve soon after approved SVB\u2019s merger,\u00a0declaring<\/a>\u00a0that the bank would not \u201cpose significant risk to the financial system in the event of financial distress.\u201d<\/p>\n

Less than two years after that, regulators announced they would be bailing out the bank\u2019s uninsured depositors.<\/p>\n

The warning sign came five years before that bailout. It was July 2018, just after former president Donald Trump<\/a>\u00a0signed a bill<\/a> rolling back the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed after the financial crisis to improve oversight of banks. At the time, the Financial Stability Oversight Council (FSOC), set up by Dodd-Frank to identify risks to the financial system, published a list<\/a>\u00a0of major mid-sized banks and their levels of deposits with no federal insurance. If these banks were to fail, the uninsured deposits would not be accessible to the depositors.<\/p>\n

One financial institution stood out for having far more uninsured deposits than all the others: Silicon Valley Bank, where more than 90 percent of the deposits were uninsured. In comparison, on average, the other mid-sized banks had 44 percent of their deposits uninsured. (Today, uninsured deposits\u00a0constitute<\/a>\u00a0more than $8 trillion \u2014 about 40 percent \u2014 of all bank deposits.)<\/p>\n

Third on the list for most uninsured deposits was First Republic Bank, which had 67 percent of its deposits uninsured. Last week, shortly after SVB\u2019s collapse, large banks\u00a0deposited $30 billion<\/a>\u00a0in First Republic amid a run on its deposits, in an attempt to prevent another bank failure.<\/p>\n

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Source: FSOC Study of Uninsured Deposits at Mid-Sized Banks<\/a> in 2018.<\/figcaption><\/figure>\n

The list was part of a report that the council \u2014 composed of top officials at the Treasury Department, Federal Deposit Insurance Corporation (FDIC), and Federal Reserve \u2014 had published about its decision to remove its \u201csystemic risk\u201d label from a different mid-sized bank.<\/p>\n

In the same report, the council warned that uninsured deposits are at a much higher risk of bank runs than insured deposits.<\/p>\n

\u201cFDIC-insured deposits and uninsured deposits have different degrees of risk, and therefore would generally be subject to runs of different severity,\u201d the report says. \u201cIf a bank were to experience material financial distress, FDIC-insured deposits would be expected to run at a considerably lower rate than uninsured deposits.\u201d<\/p>\n

According to the report, a\u00a02018 paper<\/a> by three FDIC economists found that, \u201cat one banking institution, in a context of significant bank-specific distress, uninsured deposit accounts liquidate at a rate 92 percent faster than other accounts. The authors determined that their findings generalize to other banks.\u201d<\/p>\n

And yet despite that acknowledgement, regulators appeared to take no action to force SVB to mitigate the risk posed by its high proportion of uninsured deposits, nor to subject the bank to enhanced supervision. \u201cIf examiners believe banks are operating in an unsafe and unsound manner, they can use their prompt corrective action authority to impose significant remedies on banks,\u201d said Todd Phillips, a former attorney at the FDIC. Regulators could have required SVB to hedge against the risk posed by rising interest rates, or increase its cash reserves, for example.<\/p>\n

Outside experts say high proportions of uninsured deposits are a major bank-run risk factor that should have prompted the council to take regulatory action.<\/p>\n

\u201cHaving high levels of uninsured deposits should have been a risk that examiners identified,\u201d said Phillips. \u201cAs we saw, SVB\u2019s uninsured depositors ran when the bank got into trouble. Going forward, supervisors need to be cognizant of this risk and require banks to diversify their deposit base.\u201d<\/p>\n

Cornell University law professor Robert Hockett agreed. \u201cEven after the 2018 rollback of Dodd-Frank, this would have been something that any sensible prudential regulator . . . would flag and then follow-up on,\u201d said Hockett. \u201cIt is the quintessential risk for an institution of this type, going back even before the old \u2018tulip crisis\u2019 in Amsterdam centuries ago.\u201d<\/p>\n\n \n\n \n \n \n\n \n \n

You can subscribe to David Sirota\u2019s investigative journalism project, the\u00a0Lever<\/i>, here<\/a>.<\/p>\n\n\n\n

This post was originally published on Jacobin<\/a>. <\/p>","protected":false},"excerpt":{"rendered":"

As lawmakers look for clues about the corporate and regulatory failures at the root of the current bank crisis, a little-noticed report from the government\u2019s top regulators could be one of the smoking guns. It shows that years before customers tried to flee Silicon Valley Bank (SVB) en masse, leading to its collapse, regulators knew [\u2026]<\/p>\n","protected":false},"author":1777,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"_links":{"self":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/1032645"}],"collection":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/users\/1777"}],"replies":[{"embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/comments?post=1032645"}],"version-history":[{"count":1,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/1032645\/revisions"}],"predecessor-version":[{"id":1032646,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/posts\/1032645\/revisions\/1032646"}],"wp:attachment":[{"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/media?parent=1032645"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/categories?post=1032645"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/radiofree.asia\/wp-json\/wp\/v2\/tags?post=1032645"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}