SVB Made 'Elementary' Error Before Its Collapse

Larry Summers weighs in on bank's mistake of failing to account for rate hikes in investments
By John Johnson,  Newser Staff
Posted Mar 14, 2023 9:25 AM CDT
Explaining the SVB Mess in 30 Words
A Silicon Valley Bank sign is shown in San Francisco, Monday, March 13, 2023.   (AP Photo/Jeff Chiu)

The fallout continues over last week's collapse of Silicon Valley Bank, as well as the government's response to protect depositors' money. A look at coverage:

  • In short: Former Treasury Secretary Larry Summers tweeted that SVB is guilty of "one of the most elementary errors" a bank can make. His 30-word explanation: "borrowing money in the short term and investing in the long term. When interest rates went up, the assets lost their value and put the institution in a problematic situation."

  • The concern: One big fear is that other midsize banks will face the same trouble. "Investors worry that some banks might share SVB's reliance upon a narrow depositor base and assets that have lost value during the past year of rising interest rates," per the Washington Post. That was reflected in the dismal performance of bank stocks on Monday. However, bank stocks (particularly First Republic) were looking much healthier on Tuesday, reports CNBC, suggesting that "concern over the state of the regional bank appeared to ease after a day of heavy selling."
  • A bailout? The feds decided to protect the money of depositors at SVB and another bank that failed, Signature, beyond the usual insurance threshold of $250,000, though they insist it's not a "bailout." The New York Times explains that's true in "key" ways—SVB and Signature Bank were shut down, for example—but a debate is nonetheless underway on whether the move made sense. "The Fed has basically just written insurance on interest-rate risk for the whole banking system," says Steven Kelly of Yale. That "could stoke future risk-taking by implying that the Fed will step in if things go awry," per the Times.
  • The precedent: NPR also takes a look at the danger of that precedent. If other banks run into trouble, the FDIC will be under pressure to step in again (by tapping an insurance fund). Regulators have made the case that what happened to SVB and Signature was unique and threatened to lead to a greater contagion, but if other banks failed to properly account for interest rate hikes when making investments, more could collapse. Another question being debated is who should get future rescues.
(More Silicon Valley Bank stories.)

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