Silicon Valley Bank’s shocking 48\u002Dhour collapse took many by surprise, but trouble signs were apparent before its downfall. Find out more.
The joint statement and decisive action of the Treasury, Federal Reserve Board and the FDIC might shore up confidence. Amongst other actions, the Fed on Sunday announced it will let almost everyone have their money. This is exactly the sort of lender of last resort action needed to calm fears.
However, it does raise other issues. In particular, what is the point of deposit insurance if all depositors are made whole? This is especially the case for non-systemically important banks. Clearly the plan is to use the FDIC’s fund to keep everyone whole and then likely jack up deposit insurance premiums for everyone else to replenish the fund. This keeps taxpayers off the hook, which is a positive, but punishes institutions that acted more prudently.
At the same time, the stress tests that were devised following the 2008 financial crisis were irrelevant in 2023. The failure here is not a lack of stress testing but gaming the stress tests through asset classification. It was a failure by the board and regulators to deal with the fact that after adjusting for mark-to-market the bank had almost no capital. That’s deeply problematic in a world where most of your deposits are a flight risk.
It goes without saying that regulators should ensure financial institutions hold adequate capital to absorb potential losses in interest-sensitive assets during a rate increase cycle. This may include setting higher capital requirements for financial institutions with significant exposures. At the very least it involves more attention to the stress-testing process.
In Canada, banks typically hold a higher percentage of retail deposits and are far more diversified than SVB. Even so, our officials must increase their monitoring until matters settle, as OSFI has done with daily testing.
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