The real story here is about keeping monetary policy separate from the need for further regulatory reform to achieve the most sustainable outcome in the end, writes Adrian Blundell-Wignall.
Extreme low interest rates at the short end, with the long end held down via QE policies, are distortions that lead to bad investment decisions. Silicon Valley Bank is an illustration of the latter.
The Trump administration also unwound hard-won regulations that applied to small- and medium-sized banks – just like SVB.As the tide goes out, the recent Fed tightening has shown us which banks have been bathing naked. The “triple-S” failures are a part of this. I suspect there may be some more around too.
There are three steps to deal with this well-known sort of crisis: guarantee deposits, provide lender-of-last-resort cash and, for insolvent banks, wipe out shareholders and recapitalise with new owners.A quick look at the SVB balance sheet is instructive. Only 34 per cent consisted of loans forAvailable-for-sale securities in the trading book were 12 per cent of the balance sheet, and hold-to-maturity securities in the banking book accounted for 43 per cent.
For Northern Rock, mortgages seemed an attractive high-return asset under the Basel II internal risk-weighting approach. It loaded up on them and expanded the balance sheet more quickly than it could attract sticky deposits. Instead, the Rock funded itself with rapidly rising wholesale liabilities. This funding evaporated when the sub-prime wobbles began.
The Trump administration’s roll-back of regulations, lobbied for by SVB, included a no-need-for-stress-test status for smaller banks. Such tests are the very thing that would have avoided such a crisis.SVB management was so unaware of the dangers of rising interest rates that it reallocated more of its trading book towards long-duration Treasury and mortgage-backed securities last year.
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