Saturday, March 18, 2023

Bank Crisis

What do you think of the current bank crisis?

First, last week three banks collapsed (Silicon Valley Bank, Signature Bank, Silvergate Capital).  The first two were the second and third largest bank failures in U.S. history. Now, First Republic and Credit Suisse are in trouble, even though ,yesterday, they got capital infusions ($30 billion for First Republic from a consortium of large U.S. banks, and 50 billion Swiss francs for Credit Suisse from Switzerland's central bank).

In the case of Silicon Valley Bank, it seems like management made two big mistakes: 1. Their clientele  wasn't diversified enough away from tech startups. 2. They chased returns and, even though the Feds gave ample warning that interest rates would go up, they had most of their deposits tied up in long term (10 year +) treasuries.  Now, with the economy slowing, too many of the tech startups wanted to take out cash at one time, forcing them to sell the treasuries at a loss.


This brings up some questions:

1. Will there be other banks?  Will this become a cascading crisis?

2. Is the Federal government response appropriate, or are they encouraging moral hazard?  Normally, FDIC insurance only covers up to $250,000 of deposits.  Many of these startups had much more in their accounts.  The government announced that, to stave off systemic risks, they will guarantee all deposits.  Are they helping out politically connected tech companies at the expense of taxpayers?

3. Also, the central bank will allow banks to put up their underwater treasuries as collateral, and borrow the full monetary value for 2 years.  Is that wise to stem risk, or is that a further bailout that might encourage reckless behavior in the future?

© 2023 Praveen Puri