WASHINGTON — Travis Hill, vice chair of the Federal Deposit Insurance Corp. said on Monday that deregulation did not cause Silicon Valley Bank's failure. Instead, he blamed the bank's underwater investments in long-dated fixed-rate securities and flighty deposit base for its collapse.
At a roundtable discussion hosted by the Bipartisan Policy Center — in the
He said that the Fed's aggressive efforts to stem damage of pandemic stimulus-triggered inflation turned the screws on over-leveraged banks, and that the speed and nature of SVB's deposit flows made it vulnerable to a deposit run.
"Many banks had kept an eye on their interest rate risk and asset liability management, Silicon Valley Bank (SVB) did not," he noted, "When SVB belatedly tried to address its problems in early March, by selling securities at a loss and raising capital to fill the hole, its depositors lost confidence and stampeded for the exits."
One way he suggested regulators might move to address interest rate risk was by requiring banks to hold capital against unrealized losses on bond investments.
"One much-discussed way to try to address this problem would be to require banks to hold capital against some — or all — unrealized losses on their bond investments," he said.
Although this approach has its downsides — like the tendency, he said, for market prices to exaggerate fluctuations in value during times of stress — it may prevent future instability, he noted.
"It is possible that moving aggressively in this direction would have reduced the likelihood of SVB's failure, as it may have forced the bank to address its core problem sooner: either by raising more capital or by reducing the maturity of its assets," Hill said.
Hill also thinks any reforms to deposit insurance must balance depositor confidence with market discipline, saying policymakers should consider both existing and new authorities.
"The deposit insurance cap is set not at $250,000 per depositor, but at $250,000 per depositor per institution per right and capacity," Hill said. "Which means that the cap is $250,000 for some depositors and much, much higher than $250,000 for others… which might lead one to wonder whether those who would be most likely to impose market discipline are instead those most likely to ensure that all their funds are insured."
He noted that the speed of deposit flows today also heightens the risk of runs, saying SVB's depositor outflows accelerated at a faster pace than anything the U.S. banking sector was accustomed to.
"From SVB's perspective, the supersonic speed of the run probably did not matter much: whether the run took six hours or six days, once confidence was lost, it was gone," Hill said. "But from the FDIC's perspective as the resolution authority, the speed mattered a great deal."
He conceded that the failures may warrant new regulatory revisions. For example, he thinks regulators will need to consider making banks hold more capital against unrealized bond losses, and consider whether regional banks should issue long-term debt to absorb losses in resolution ahead of depositors and the Deposit Insurance Fund. Overall however, Hill's comments prioritized restraint, warning of the danger of going too far.
"We should closely review the lessons to be learned from the recent failures, and be open to targeted changes to our framework," Hill said. "But we should be humble about what our rules and policies can accomplish, and avoid the temptation to overcorrect."
The
"The rule changes did not change the stringency of capital standards for a bank of SVB's size, the stress tests did not test for rapidly rising rates, and the exact thing that got SVB in trouble — investing in government bonds — is exactly what the liquidity coverage ratio is designed to require," he noted, "The reasons for SVB's failure are quite straightforward and easy to explain."
