When you combine a confidence game, fractional banking, and idiotic risk management with the Federal Reserve’s 13-year zero-interest rate policy regime, you get what we saw in recent days with Silicon Valley Bank. SVB can now be added to the list of infamous bank failures over the years, including Washington Mutual, IndyMac, Bear Stearns and Lehman Brothers. It’s the largest bank failure in terms of assets—some $209 billion at the end of 2022—since the 2008 financial crisis.
The SVB failure, which occurred so swiftly over the course of 48 hours, raises many questions, but I am reminded of a couple undeniable truths: It’s amazing how often bank executives fail to comprehend the fragility of their institutions, and the extraordinary risks inherent in borrowing short and lending long.
I don’t mean to make light of what happened at SVB. On Sunday morning, Treasury Secretary Janet Yellen said on CBS that the Treasury was working closely with the FDIC to protect depositors beyond the FDIC-insured $250,000 threshold but that there would be no bailout of SVB. Supposedly some 93 percent of the bank’s $161 billion of deposits are uninsured, which makes sense given that it housed the operating accounts of so many companies, venture capital firms and wealthy individuals. (Why they all did so much business, nearly exclusively, with this bank is a topic for another day.)