Commentary
Banking regulators, along with the board of directors and management of Silicon Valley Bank (SVB), each failed to see or prevent the problems that destroyed in less than a week one of the largest banks in the country. The regulators, whose mandate is explicitly designed to prevent such a disaster, allowed SVB to grow too fast when effective controls were not in place. No chief risk officer was in place for eight months, until January 2023, at which point it was too late.
SVB’s total assets tripled in just two years, from $71 billion at the end of to 2019 to $211 billion at the end of 2021. While deposits also tripled, they were low-quality demand deposits that could be withdrawn immediately at the first whiff of trouble. The bank grew deposits too fast to find creditworthy customers to lend to, so instead the bank invested more than $100 billion of its liquidity in investment securities, which, when interest rates rose, resulted in billions of dollars of losses. Depositors got wind of the depth of the issues, and within hours, SVB exploded, casting shrapnel far and wide, and the entire U.S. banking sector was set afire….