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“This is not rocket science. This is Banking 101.”
Last week, Silicon Valley Bank, one of the most prominent banks used by the venture capital and startup sectors, collapsed.
SVB’s rapid crash—the largest such failure since the 2008 financial crisis—grabbed headlines and generated concern: How could a bank with nearly $210 billion in assets fall apart in just a matter of days? And, perhaps more to the point: How worried should I be?
Ross Levine, an economist at the University of California, Berkeley business school who specializes in banking and finance, believes SVB’s collapse is a manifestation of other problems within the banking system, and among federal banking regulators, that have been growing for years.
In the last week, many experts have focused on the 2018 legislation passed by the Trump administration to deregulate banks like Silicon Valley Bank. Its CEO, Greg Becker, engaged in an expensive, multi-year lobbying campaign to help pass this law, which raised the threshold for banks subject to additional risk checks—also known as “enhanced supervision”—by the Federal Reserve from $50 billion in assets to $250 billion, a line that SVB never crossed ahead of its collapse. The theory goes that this deregulation contributed to SVB’s failure.
Levine, who’s co-written two books on banking regulation in the United States and abroad, thinks that argument is both far too simple and absolves federal banking regulators of responsibility for the mistakes they continue to make in overseeing the banking system, going back as far as their response to the 2008 financial crisis. Here’s more of our conversation from earlier this week, edited for clarity and length:
What is your theory of how things got this bad at SVB?
SVB took lots of uninsured deposits from 100 or 200 really large depositors and invested a large portion of that money in long-term securities—very, very safe securities, so US Treasury securities and government-backed mortgage securities. This created an extremely fragile bank with respect to interest rates: Interest rates go up, bond prices go down, and that change is particularly big for long-term securities. So the value of the assets of SVB fell as interest rates rose.
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