the case Silicon Valley Bank (SVB), which erupted last March, divided public opinion: on the one hand, those who believe the failure resulted from overly lenient US regulation, and on the other those who attribute it to an increasing interest rate environment. . analysis Alpay Soyturk, Chief Regulatory Officer at Spectrum Marketsdelves into the causes of SVB bankruptcies, and stresses the importance of strict regulation and strong supervision for the proper functioning of the financial system as a whole.
SVB bankruptcy, two streams of thought
There is an active debate going on in the United States as to whether The current banking regulation is sufficientWhether small banks should come under more scrutiny and the impact of deregulation under the Trump administration.
According to the report, the bankruptcy of SVB in March divided political opinion: on the one hand, those who feared further risks of contagion, and on the other those who attributed the bankruptcy to a context of higher interest rates and too much regulation allowing the United States. This last point may sound ridiculous, since Banks blamed the low interest rates He urged relaxation of regulations for more than two decades,” says Alpay Suetürk.
Regardless, there’s no denying that something is wrong if a failure of this magnitude suddenly occurs. True, in 2017, the SVB received a 5-year deferment from the so-called Volcker rule, which restricts banks from using deposits to engage in private business activities and from owning or investing in a hedge fund or private equity fund; An exemption granted by the previous government to all banks. However, the analysis reads, although this step was debatable and discussion about path reversal is necessary, focusing on this aspect does not help to see the full picture. While attributed to poor risk management, SVB’s problems do not stem from poor asset quality.
The real problem behind the SVB crisis
Putting an interest bearing position under stress by subjecting it to simulated changes in basis points is one of the most basic scenario analyzes performed in liquidity risk management. There is nothing complicated about determining the effect of a rise or fall in interest rates on interest income e There was plenty of time to realize that The time will come when central banks will begin the cycle of raising interest rates,” wrote Alpay Soyturk.
in 2015, The total loan/deposit ratio of SVB was just over 40%; By way of comparison, just consider that this ratio for major banks in the Eurozone was 105% in 2022. While a very high loan-to-deposit ratio indicates a high probability that the bank will not be able to cover any losses on loans, a very low ratio indicates That the Bank is operating at a less than adequate level of profitability. As a result, the analysis reads, since deposits became a completely free source of financing for the bank, in an environment of ultra-low interest rates, SVB invested heavily in high-quality investment-grade assets, such as US Treasury bills.
If you want to get a return in this case, it is necessary according to Alpay Soytürk Engage in the longest part of the curve, as did SVB. The other basic economic lesson is that as the interest rate on a bond goes up, its price goes down – that is, the increase in interest income will come at the expense of a decrease in the bond’s balance sheet valuation.
At the same time, if the bank intends to keep its deposits during the period of rising prices, it must also pay interest on them.
This is where SVB is surprised. On the other hand, the analysis reads, it turns out that a small group of entrepreneurial customers are as well Big problem when interest rates started to rise, which complicates access to financing, especially for startups, with customers who have withdrawn their deposits to maintain liquidity in their companies. A larger and more diversified depositor base would have meant a less dynamic withdrawal process in response to the bank’s inability to pay higher deposit rates.
Differences between Europe and the United States
Cases like SVB highlight a misunderstanding of the importance of order. According to Alpay Soytürk, it is a mistake to think that the possible consequences of bank failure are not necessarily, or are not exclusive, related to their systemic importance.
If we look at the eurozone, we can count on a A clear system for determining systemic significance to a bank based on its size, economic importance, cross-border activities, or whether it has applied for or received financing from the ESM (European Stability Mechanism) or EFSF (European Financial Stability Facility). Moreover, according to the analysis, a bank has systemic importance if it is among the three largest banks in a Eurozone country. In addition, the ECB reserves the right to classify any bank as a significant bank, in order to ensure consistent application of relevant supervisory rules.
However, political debate rages in the United States over whether or not to lower the minimum at which a bank should be considered systemic or important. The SVB example, if we want to assess its value as a system, shows this Neither the size of the bank nor its links They should have raised concerns that the financial system was in serious trouble. As a reminder, deposits (those not withdrawn) are still there, and bank assets have not lost value either. Therefore, Alpay Soytürk points out that “it is completely irrational to create a bigger picture of problems for the industry because Silvergate filed for bankruptcy – a small, completely systemically irrelevant bank that is closely linked to cryptocurrency valuation and has nothing to do with SVB.”
The point, according to the Spectrum manager, is a strict organizational system and, above all, strong oversight They are necessary and inevitable for the functioning of the financial system As a whole. Moreover, the SVB case highlights a type of risk that can be defined as personal. In recent years, the idea of a certain kind of “emerging investor cunning” that sometimes turns a successful bet into a strategy has taken hold. This argument is used to call for the deregulation of industries such as cryptocurrencies and the removal of all barriers between investors and their potential wealth. However, Alpay Soytürk concludes, “Regulation is there to protect all individual consumers and investors and to ensure the stability and resilience of the financial system. It should under no circumstances back down from an individual’s paranoia, whether in a pinstripe suit or flip flops.”
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