As the dust (hopefully) settles on a chilling recent spate of bank failures, it is critical to understand the benefits of a diverse and robust banking system that includes small and midsize banks, like the recently shuttered Silicon Valley Bank (SVB), and how we can safeguard their survival.
To understand why over-concentration in the largest banks is so dangerous for innovation and economic dynamism, my company's experience with the banking sector is a prime case study. Our first bank account was opened with SVB, and we quickly diversified by also opening an account with one of the top five largest banks in the country. Unfortunately, that account was soon thereafter shut down by the bank as they enforced a "de-risking" policy and ended relationships with subscale cross-border money transmitters, like us.
De-risking refers to an ongoing trend whereby many of the largest banking institutions have cut ties with perceived higher risk customers, including money service businesses, nonprofit organizations and innovators seeking to serve historically disadvantaged populations, both domestically and globally. A
While our country's largest banks have the luxury of turning away legitimate business based on de-risking policies, there have fortunately been a limited number of small and midsize banks, like SVB, willing to step into the void.
These banks provide services based on the traditional notion of relationship banking, where they spend the time getting to know the business customer and its management team. Based on this high-touch relationship, SVB was in our case willing to provide a line of credit (required to keep the cost of sending money low), letters of credit (required by regulators) and core banking services (again, hard to secure due to de-risking). As we grew, they were a true partner that proved repeatedly adept at working with us to achieve mutually beneficial outcomes. While we have since grown into a broader and more global set of banking relationships as we became a public company, SVB played a critical role in our ability to survive and thrive when we were still an early stage startup. Notably, we are only one of many thousands of such companies that owe long-term success to this banking relationship.
To be sure, SVB's senior management team made some existential mistakes that merit review and learnings, both by other bank leaders and the regulators who supervise banks. It will take time for these to be done thoughtfully. However, in the short term, what policymakers must now ensure is that contagion fears do not result in the unintended consequence of further bank consolidation and over-concentration at the largest banks, while our small and midsize banks further wither.
To this end, there are a number of steps policymakers should pursue that can prevent this outcome — and its severely detrimental impact on consumers and the future of innovation.
First, regulators should facilitate the sale of the resolved SVB to a buyer committed to maintaining the best of the SVB culture, namely working with this country's next generation of builders. While appropriate risk mitigation policies are of course warranted, the core problem SVB faced was an unhedged mismatch of assets and liabilities, not the provision of its primary banking services. Bank regulators should also continue to charter new banking entrants seeking to serve the void left by SVB and its failed peers.
Second, we need to acknowledge the incredible and swift work of the Federal Deposit Insurance Corp. in preventing a broader economic meltdown through rapid application of its insurance scheme to all involved deposits, but also need to embark on a national review of how to modernize the overall insurance system. While corporate entities have the sophistication and responsibility to consider how best to safeguard company assets, it is also important for policymakers to calibrate economic objectives in setting appropriate deposit insurance levels, including for such corporate entities. In reaching this calibration, policymakers will need to consider the incentive structure in place for how corporate funds are allocated, whether to individual banking institutions, across multiple institutions or to particular asset classes, including money market funds and government securities.
Finally, we should not impulsively impose the same level of regulation on small and midsize banks as we do our largest. Instead, we should thoughtfully look for ways to mitigate identifiable risks and enhance the quality of supervision. As we do so, we must reject blanket calls for further de-risking that we see with our largest banks, as doing so will only squelch startup and small business access to capital.
The path to progress is never an easy one. Our country's resilience and innovative spirit is predicated on learning from mistakes and moving forward. Let's be sure we never forget the importance of banking on innovation and a better and more inclusive financial system.
