How Silicon Valley Bank Avoided Oversight
wsj.com
wsj.com
If a bank is complaining about the overhead, effort, cost, complexity of adhering to risk management protocols...
they're really actually saying "if it wasn't for pesky government, we'd be more than happy to take more risks with -your- money."
but do increase operating costs unnecessarily
These are random documents sent to the government when some transactions over a certain dollar amount are done, ostensibly to help prevent money laundering, in practice just waste everyone’s time.
The Government Accountability Office has reported on this for 30 years. GAO reports are full of other examples too.
And don't most banking systems automatically generate a CTR based on the transaction ledger? It's not like a teller is filling out a form and faxing it.
Getting to that point took a very long time.
But its not that much more efficient on the FinCEN side.
The HSBC thing is also another example of how the rest of AML/KYC is not the best implementation. It is only as strong as its weakest link, while burdening all links in this fairly pointless exercise of whitelisting transactions, instead of tackling the actual regressive behaviors that are illegal.
Such as some random reports banks are required to file to FinCEN. Just creates an infinite loop of paper nobody ever evaluates.
Some mandatory personnel a regulator requires, yet cannot realistic do their adversarial job in an at-will employment world.
There’s more.
FinCEN reports aren't related to bank failures, they're related to money laundering and other financial crimes. FinCEN means "Financial Crimes Enforcement Network." Banks file these reports because a number of financial crimes require the use of bank services.
And most agency personnel would outcompete you in an adversarial at-will employment world. They work for the government, for less pay, because they want to, not because they need to.
Yes the internal auditor of the government released reports of failed government policies, how did you read anything else
We're talking about bank regulations, not every failed government policy. It appears you're just trying to move the goal posts.
The main problem is that the government is too involved; namely that banks can get Congress/Federal Reserve to bail them out, as we see yet again. It really doesn't matter what rules gov sets, if it's always going to panic and dole out printed money at the slightest hint of hardship (and thus potential incumbent demise), you will get bad behavior, and those involved will do something like this again (plus inflation to boot).
If the costs are instead borne by the bank, and depositors of that bank, yes it will suck for many, but also risky investments like the kind SVB engaged in will be shown not to pay off. Depositors will ask many questions on the status of their deposits at other banks, forcing banks to be more transparent/less frivolous with client money.
None of which will happen now; the Fed took care of it after all! Maybe we'll get more emotional banking rules implemented, maybe not. Can definitely kicked down the road though, I'll be expecting another such failure in ~15 years time, if that. It's really getting old, and seemingly happening with more frequency regardless of the number of rules implemented.
Only the little people, with no connections to the decisions, get hurt when a bank fails. All the leadership gets out, no punishment, and maybe even makes a profit.
If we want to talk about changing rules for FDIC on what's covered, then fine.
What I have a hard time with is this panicked rule change to create a temporary (at least for now, as devs we all know how temporary fixes often go...) system for banks to sell treasuries at par instead of at market. Do the 'little people' get such a deal with what treasuries they may have?
And remember that this is happening because interest rates were hiked very quickly recently, causing treasury market prices to dip, and that happened because of the need to combat high inflation, and that happened due to the excessive bailout spending in the pandemic (more money chasing same/fewer goods), and that happened because of gov heavy-handily shutting down a LOT of the economy (it's okay, it was just the non-essential 'little people' work though...).
I could go on, but it's clearly one blunder fix after another. Maybe this recent FDIC action and halting interest rate hikes will be enough to soften the blow, and won't cause enough side effects to notice much. Who knows? I'm just skeptical.
I guess we'll see in 15 years or so...
It's very temporary - it has a date baked into the law - they must have bought the treasury before the start date of the law to use it as collateral. And they can't "sell" the treasuries, they can borrow against them at the Fed interest rate plus 1%. It's not exactly the great deal you think it is.
It's just to give banks some liquidity, that's all. They certainly won't profit from it - the US government will actually make money from this.
> Do the 'little people' get such a deal with what treasuries they may have?
Yes actually, you too can borrow under this plan if you bought the right treasury type before the start date. It's a really bad deal for you though, the interest payments will cause you to lose money. It's only worth it for you if you absolutely must have cash right now, and you don't care what it costs.
> I guess we'll see in 15 years or so...
It's a 1 year plan, and the effects will be completely minimal.
Although this is almost trivially true: any single gov spend inflation effect is 'pretty much zero'. That's not the same as 'free' though. All spend together adds up to at least 2-3% in good times.
... and it just went up by 0.4% last month: https://reason.com/2023/03/14/inflation-isnt-going-away/
yikes
That doesn't mean that the Fed making depositors' bank balances that already existed continue to exist (and mostly continue to stay in the bank) most of which is simply a payout from an insurance fund doesn't add less inflationary pressure per dollar than most other types of spending, that the number of dollars involved isn't an exceptionally tiny fraction of the economy or that a 0.25% rise in the interest rate wouldn't have several orders of magnitude more impact in the opposite direction.
Its probably strongly positive, in that the knock-on effects of letting them burn would be an economic meltdown that would rapidly reduce inflation.
The monetary effects of the additional net spending before considering that os probably minimal, though.
You should have finished your post here. Nobody with any exposure to the real world should be suggesting if a bank's highly skilled risk management professionals working full time on assessing the bank's financial position with access to the confidential data can't assess the risk factors of the bank's bond portfolio adequately enough to keep the bank alive to continue paying them massive salaries and nor can any of the bank's wiped-out equity investors, the real problem is that Joe Sixpack just isn't motivated to spot it in the few minutes of his spare time he gets to ponder changing his bank account.
I mean, you're in a minority of people so confident in your knowledge of the banking system you're willing to offer a diagnosis of its "main problem", but I bet you still couldn't tell me what's unusually risky about the composition of SVB's bond portfolio and what implications that has for your own banking arrangements now it's been in the news for a week, never mind last month when people would have needed to know if they wanted to still have a startup.
I mean, I'm not saying people shouldn't learn lessons from bank failures. It's just that the lesson most of us learned is banks failed a lot more when they weren't regulated and insured.
It appears that they naively believed that if they converted $1 of today-money into $1 worth of today-bonds that those bonds would always be worth at least $1 nominally since bonds yield interest and the $1 principal is returned to the bond-holder once it reaches maturity... It seems that they couldn't imagine how a bond which costs $1 and yields $1 + interest could be worth less than $1?
It appears that they failed to understand that $1 in today-money is not necessarily worth the same as $1 in tomorrow-money (or especially 10-years-in-the-future-money). If you look at history over the past 50 years or so, tomorrow-money has always and predictably been worth less than today-money. So it's a gross oversight.
I didn't study economics, finance or business and I'm basically a dumb pleb scraping by the bottom rung of society, yet even I knew that.
That's why I often get caught up in conspiracy theories. It's hard for me to believe that these wealthy, highly educated people don't know this stuff. I tend to think that a lot of such things are malicious and intentional because I believe that the elites are intelligent. But then I think, why would these people risk going to jail over a scheme when they are already well off regardless? Are they compromised individuals being extorted for over a decade straight with the intention to basically run the company into the ground (for the benefit of third parties) and then be the fall guy? Hmmm seems very far fetched...
SVB was happy to conceal their precarious position until they were required to recognise and disclose losses when they sold some of their bonds.
Is there any reason we should promote personal responsibility on the part of depositors.
The author's children are VC. What appears to be an easy question suddenly become challenging.
The biggest depositors added pressure on the bank to be more risky.
i.e. carnage, a big bloody nose, but not an extinction level event.
Maybe the depositors deserved a bloody nose. But do their employees, vendors, and contractors?
And don’t think that handing more power to the federal government would be any different. Take a look at what a revolving door there is between banks and regulators, particularly during crises. Geithner, Paulson, Mnuchin, Bernanke, Bob Rubin, Larry Summers, etc…
I have a naive question. When I was a little kid and the FDIC only insured the first $100,000, I thought, "If I were rich, I'd have to have multiple bank accounts." Do big companies not do this with their liquid assets as a matter of course? Are there just not enough banks? Or would per-account fees unknown to me as a little guy eat into savings? I get that big companies directly hold a bunch of bonds, too. But if they use a bank so they can actually write checks, why not many banks?
They provide up to $50 million worth of combined coverage, by splitting across dozens of partner banks into $250k chunks. Yes there are fees associated with purchasing such a service, but I'm not really sure why it's not more popular or more commonly adopted as SOP for small to medium enterprises to do this.
Maybe there is a convenience or liquidity factor that I'm missing, or maybe people really didn't think the cost was worth it (but I'd guess many are probably reevaluating now, just how safe or unlikely they think a bank failure really is)?
One can hope at the very least all the execs bonuses for the past 2 years need to be refunded to help pay for what the FDIC needs to pay out.
Why ? Yes, they said the Taxpayer will not pay, but that is a kind of lie of omission. The Fees Banks Pay the FDIC will be raising, that was stated. But where do these fees come from ? You know who, we will pay higher fees on our Bank accounts and higher interest rates on Loans and probably Credit Cards.
None of the journalist asked or brought up that point. So yes, the Taxpayer will pay for so they would not loose the amounts over 250,000. Again, no risk for the well-to-do but "main street" pays.
The government is still providing liquidity and coercive muscle -- so it's still a bailout, plain and simple. Despite the attempts we are seeing to paint it otherwise.
I don't want the US government to be driven by a profit motive any more than it already is...
Since most of the money is in treasury bonds, the government can either wait until then, or maybe nullify the bonds that are now in their hands, since it is now the government owing the government money (there is probably some complexity there, but I don't know my way though it). In the mean time the depositors' money needs to come out of the FDIC, and that is probably going to increase costs for banks (and thus their consumers), until things can be worked out.
TARP had three players:
TARP Fund: via The US Government (fiscal),
POMO/QEx: via The Fed (monetary), and
The Banks (those bailed out)
TARP "made a profit" by the Fed printing money and buying assets at way above market value from the banks. It didnt cost anything because we just printed the money, but there was a cost...inflation. We just spread the cost secretly to everyone.
Real impacts of printing money: Houses jumping in value by 40 or 50%, meanwhile:
https://www.costar.com/article/266860380/most-us-households-... Most US Households Can't Afford a Median-Priced Home
https://www.nahb.org/blog/2022/03/36-million-households-cant... "36 Million Households Can’t Afford a $150,000 Home"
That's like selling your used car for a "profit" during the recent supply chain issues caused by the pandemic. Sure, you might have gotten more dollars from the sale than you did when you purchased it. But those dollars are worth a lot less now, and you would not be able to repurchase an equivalent car with those dollars.
The TARP profit line is how they deflect some of the outrage from yet another bank bailout. "See, it didn't cost you, the taxpayer, anything!".
I guess you can say that customers were bailed out, but the bank was not.
I'm less concerned over semantic arguments of what technically constitutes a bailout. Personally a stable banking system is important to me, as is accountability for risky investment strategies. I have a hard time seeing the situation is black and white enough to jump to a conclusion on exactly what the delta is between what happened and what should have happened.
As for consequences beyond that? Unsure.
Hopefully the CEO (now on his second failed bank) doesn't "fail upwards". I mean it's one thing to have a poorly performing bank on your resume... it's another to have two banks forcibly closed by the FDIC.
The shareholders are currently suing the board and the executives for running the bank into the ground.
Ten years from now, once all the long-term investments settle, if there's any money left over, the shareholders might be entitled to two turnips and cup of coffee from Uncle Sam.
As far as 'The guilty getting their just deserts', this is a rare example of the world mostly working in a just way.
There are jurisdictions where executives responsible for this sort of failure would be shot and have their assets confiscated.
Neither is likely in this instance.
There'd be a trial before their assets are seized and they're executed.
If being civilized has led to clown world, perhaps alternate modes of civilization should be instituted.
How do you define a bailout? The shareholders and bondholders of the bank lose everything. The customers (depositees) get their money back. You consider that a bailout?
Per what sources like Investopedia, Wikipedia, and all the major English dictionaries say. None of which limit the term to protections for investors.
https://www.cnbctv18.com/market/silicon-valley-bank-employee...
I don’t know that pricing insurance based on the actual cost of the potential external harm can really be considered a tax increase.
Even under Dodd-Frank and prior to the Trump deregulation, SVB was in trouble and acting badly - and regulators probably wouldn't have caught it, nor would SVB have broken the law.
They had to do stress tests this year anyway. But that wouldn't have caught onto the fact that they parked deposits from (now forgiven) PPP loans into treasury bonds in a hold-to-maturity account (thus hiding the asset risk on paper, something that isn't illegal but is suspicious that they did to a degree beyond anyone else apparently), and it wouldn't get over the fact that the Fed's own guidelines for computing asset risk told them to only take into account a 1% rise in the Fed's interest rate (it actually rose 3%!).
Point being, deregulation (real or advocated for) didn't cause SVB to fail. It would have failed anyway. The actual data they base things on is bad, and the bank was nigh criminally mismanaged.
Government encouragement of risky behavior due to bailouts is the problem, not deregulation.
I think stopping the bailout is in effect mostly enough "regulation" on its own. Anything else requires very good analysts watching this stuff and enforcing the regulation. From what I've seen, the government is very bad at enforcing most of their regulation. They're unable to do it with firearms, and they're unable to do it with the financial industry.
It most certainly did not have that.
These rules are a severe perversion of the intention of a filibuster. They absolutely should be undone, but both parties are too afraid of giving up power when they have less than the majority. It's obscene and a perfect illustration of American politics.
Now it’s just a cheap veto with no meaningful short-term cost.
Right now, there are no consequences for filibustering, so there’s little reason to use it judiciously.
The 1972 2 track rule has made it far easier to sustain a filibuster since there is little to no pressure from other minority members to compromise or just move on. The 2nd track allows just enough bill movement to prevent backlash from more moderate members.
When regulation fails, we update it to cover what we learned. When someone hides from regulation, we update the criminal codes. Regulation's goal is to steer behavior, not be a Minority Report for balance sheets.
Does anyone say that?
The second point that needs to be refuted, loudly, is that this is the Trump administration's fault for lowering the reporting frequency for smaller banks - what should really be scrutinized is what those requirements actually are and how they can be improved.
Also, to possibly strengthen the criminal code around handling bank deposits.
Banking has been a quasi-government-operated industry since 1933, and even more so since 2008, and we need to make sure that the government does not dodge blame for the failure of SVB. Government regulators are supposed to prevent this kind of thing from happening, and they didn't prevent it. You can't as deeply involved as the government is in banking and not be complicit in the outcomes of banking.
People will try to blame "lobbying" for this but let's be honest, even if regulators were looking at every bank in the US with a microscope no matter how many deposits they held, those regulators probably would have missed this. Hey, government bonds are a great investment! Duration risk is sneaky.
Who caused that duration risk to actually manifest as a real problem? The Fed! The same people who are supposed to run the banking system in a stable way have contributed to the instability of the banking system by trying to squash inflation. If the Fed hadn't raised rates so much everyone would be praising SVB for doing so well.
People have an impression that banking is a private industry and the government comes in to bail it out, when really the government was involved the entire time. If we don't understand that, we won't be able to actually fix the problems.
> the bank was nigh criminally mismanaged
For sure this was a crime. It's being reported [1] that executives were aware of the risk and continued to purchase higher yielding assets.
From the article:
In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in, according to documents viewed by Bloomberg. That shift would reduce the risk of sizable losses if interest rates quickly rose. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there.
Executives balked. Instead, the company continued to plow cash into higher-yielding assets. That helped profit jump 52% to a record in 2021 and helped the firm’s valuation soar past $40 billion. But as rates soared in 2022, the firm racked up more than $16 billion of unrealized losses on its bond holdings.
Throughout last year, some employees pleaded to reposition the company’s balance sheet into shorter duration bonds. The asks were repeatedly rejected, according to a person familiar with the conversations. The firm did start to put on some hedges and sell assets late last year, but the moves proved too late.
I wonder if any of this figured into their Chief Risk Officer's decision to leave the bank in early 2022.
[1] https://www.bloomberg.com/news/articles/2023-03-13/svb-failu...
edit: archive.is link to paywalled article [2]
they actually had NO chief risk officer for the entirety of 2022. pesky officers nagging in one ear to mitigate risks eh?
https://www.bankingdive.com/news/svb-cro-Laura-Izurieta-chie...
Hold your horse. Back up a bit to 2014, to where this snippet appeared when SVB was a nonbank at the time:
"Finally, the Board has determined not to impose enhanced prudential standards on nonbank financial companies supervised by the Board through this final ($50B stress test) rule.l
https://www.govinfo.gov/content/pkg/FR-2014-03-27/html/2014-...
Infotainment consumers happened.
I love how the white house is trying to paint this as an issue with lack of oversight and the need for MORE regulation when that's not even the issue.
Hopefully they look into the exec stock sales over the past few months. If money in a checking account is not safe, and I can't spend cash over 10k without a ton of paperwork, where can I keep cash that is safe?
These people rarely go to jail, and if they do it's a minimum sentence in low security white-collar "jail". The politicians will do everything they can to keep their donors donating.
The fact they ARE and continue engaging in this behavior right now proves you're just wrong about any possible "risk" they perceive.
Maybe they weren't?
Also, is your stance that if the majority don't do it then there's no incentive to be risky like these failed banks?
What happens if the government continues the trend of bailing them out? Do you think maybe banks will start to see a pattern and start changing investments?