OF SUBSTANCE AND SPIRIT

*(Last part)

* The chronology of the Silicon Valley Bank fiasco was anything but positive. Some believe it could have been avoided. As early as Feb. 24, while KPMG submitted a good audit report on SVB Financial, SVB’s parent company, nothing was said about the astonishing speed of its deposit growth. Nothing was found to be unusual when SVB seemed to have ignored its increasing tightness in liquidity, its bonds going under and investor confidence weakening. Somebody must have failed to connect the big dots. Yet less than two weeks later, SVB announced the inevitable. It booked a $1.8 billion loss after disposing more of its investments to service the heavy withdrawals. SVB announced its plan to raise $2.25 billion by sell-ing some common and preferred stock. Moody’s consequently downgraded SVB Financial. Wall Street Journal reported this to have occurred a few hours after the announcement. A day after, SVB Financial’s stock crashed as soon as the market opened. Contagion was as real as when the shares of the four biggest US banks also showed a similar descent with a total of $52 billion loss. Panic became contagious as social media spread the word around. Tech companies and their portfolio com-panies started withdrawing their money from SVB. At the end of the day, around $42 billion left SVB. Subsequent events were equally convincing SVB was collapsing. When banks are oblivious of risks, their dark destinies are written in the stars. On March 10, there was huge sell-off of SVB shares and the Federal insurance authorities took over SVB be-fore it opened. Signature Bank was also taken over by the insurance authorities because it was also hemorrhag-ing. Third to be affected was Silvergate Capital which was engaged in cryptocurrency. With the collapse of the FTX, the futures exchange operating cryptocurrency, it was forced to sell its investment securities to service their heavy withdrawals. Finally, First Republic’s credit rating was downgraded as junk by S&P due to its bad deposit and profitability outlook. What was unfolding in the US started to affect Europe. Credit Suisse Group shares plummeted to a new low. As Wall Street Journal narrated, other European banks were not exempted, notably France’s Société Généralé and BNP Paribas as well as Germany’s Deutsche Bank. Some quarters thought the bleeding of these big global and national banks would stop. Credit Suisse’s shares jumped a bit when it announced it was borrowing SF50 billion from the Swiss National Bank. Some 11 banks were also reported to be depositing a huge $30 billion in First Republic. But the market could not be fooled. The problem faced by these banks were fundamentally structural. Li-quidity and then solvency connected them. After the fact, everyone possessed 20/20 vision. While the US Fed was correct to pursue a tight monetary policy, observers are now quick to find fault in its oversight of the financial system. There was no rigorous oversight; the Fed should have examined the books of SVB to check the details of its basic weaknesses. The US Fed and the Reserve Bank of San Francisco should have spotted a number of red flags. Its explosive deposit growth, high degree of uninsured deposit and heavy bor-rowing against its investment holdings to create liquidity should have prompted some corrective action. The US Fed was also handicapped by the emasculated Dodd-Frank banking law of 2010. Originally, this law empowered the regulators in disciplining erring banks by limiting their trading and investment activities. The largest among them were subjected to enhanced oversight including periodic check-ups and stress testing. But Congress by a vote of 2/3 of its members in 2018 eased the law. The requirement on stress testing was limited to those above $250 billion in assets. Ironically, SVB was among those banks which lobbied for deregu-lation. A year later, the US banking system was further liberalized which, to some observers, “could weaken core safeguards against the vulnerabilities that caused so much damage in the (financial) crisis.” The justification was made in the spirit of “more flexibility,” really as feeble as it could get. Randall K. Quarles, then the vice-chair for supervision at the US Fed argued that the government should choose the ap-proach that was least burdensome for the system. He wanted bank clients to trust the banks and for the regula-tors to back off. The Economist was correct to suggest that banks should never give their depositors any reason to doubt the safety of their deposits. But SVB clients have all the reasons to doubt, run to the bank and withdraw their mon-ey. The bank hardly had risk management system in place, no risk officer for months, unduly exposed to one specialized sector, and failed to anticipate the impact of high interest rates. Its very own chief executive officer sold his own SVB stock for $3.6 million before the crisis broke out. Key central banks around the world must have anticipated that this latest challenge to the banking system could be systemic and global. Monetary authorities of Canada, England, Japan, Europe, the US and Switzerland all put their minds into one. After all, they account for about half of the world’s total output. They released a joint statement assuring the market that the crisis would be headed off because liquidity is available to the market. Credit crunch is the last wish among banks for when it happens, their clients would freeze. Which finally brings us to the issue of buying banks cheap. SVB is far from US-centric in their business model. It has its own operation in the UK but the Bank of Eng-land was correct that even if SVB poses no systemic risk in the UK banking system, it was difficult to predict what else could happen in the future. A neat solution should be ideal, and the best option was for another bank to simply assume its obligations. Somebody had to be a white knight. HSBC offered to do it for £1 or $1.2. That was not exactly for a song. HSBC covered all deposits in SVB minus the assets and liabilities of the SVB parent company. No government cash was involved, British taxpayers were spared. HSBC assumed management of £5.5 billion loan and £6.7 billion deposit. HSBC acquired SVB because it would strengthen their commercial banking franchise and enhance their ability to serve the cause of innovation and fast-growing firms in the tech-nology and life-science sector. We need to pray for what awaits similarly-situated banks or investment funds, here in the Philippines or elsewhere. They would not wish to be sold off for ₱1 or about $0.0184 for a few years of riding high only to end up as an appendage.