Setting what must be a publishing-industry record for unintended good timing, the new edition of MIT economist Charles Kindleberger’s classic history of financial crises, “Manias, Panics, and Crashes,” appeared just as Silicon Valley Bank was collapsing — and as regulators were scrambling to prevent it from destabilizing the financial system.
It’s the eighth edition of a text first published in 1978. The story of boom-bust cycles is, alas, a never-ending one, and needs regular updates. Kindleberger died 20 years ago; colleagues Robert Z. Aliber and Robert N. McCauley have kept the project going, sharing authorial credit.
Though the work of economists, “Manias, Panics, and Crashes” understands how psychology is at the root of much financial instability. Each crisis, going back to Britain’s notorious 18th-century South Sea Company bubble, has its unique aspects. Greed, fear and groupthink, however, are common to them all.
“There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich,” was Kindleberger’s wry interpretation.
Certainly, the conduct of SVB’s now former chief executive exemplified humanity’s flawed nature. Chasing profit, Greg Becker mismanaged the institution until a run was imminent last week. Then he begged clients in the venture capital “community” “to stay calm and to support us, just like we supported you during the challenging times.” Unsurprisingly, the “community” freaked out and withdrew $42 billion in a single day, March 9.
Could tighter regulation have prevented this debacle? Maybe, maybe not. In 2018, Congress did alter post-Great Recession financial rules so that banks with between $50 billion and $250 billion in assets were no longer “systemically important” — and no longer required to pass annual Federal Reserve “stress tests.”
SVB lobbied for that law, which enjoyed bipartisan support, and the net effect of which was to let the bank quadruple its assets in four years, without ever facing a Fed stress test.
Now, to facilitate an emergency rescue of the depositors, regulators have had to declare SVB and another similar sized bank, Signature Bank, systemically important after all.
Absent the 2018 bill, markets might have been spared this contradictory message. Yet would SVB necessarily have flunked a stress test? “It’s not self-evident,” McCauley, a finance expert formerly with the Fed and the Bank for International Settlements in Basel, Switzerland, told me. The Fed designs these exercises to determine how a given bank’s capital would hold up under a hypothetical recessionary disaster scenario such as the one in 2008-2009.
That was not quite the predicament confronting SVB. It grew rapidly during a Fed-engineered low-interest-rate environment, taking in vast, new short-term deposits and expanding a balance sheet invested in government bonds. When the Fed raised rates to fight inflation, SVB, having failed to hedge against that risk, took losses on its bonds, making it harder to pay depositors, who then panicked. Why the bank’s Federal Reserve supervisors didn’t raise questions much earlier is — a good question.
Also because of the 2018 law, SVB was not subject to “liquidity coverage ratio” rules that require large banks to maintain a certain level of readily accessible funding. This, too, has been cited as a cause of the bank’s failure.
However, an analysis by the Bank Policy Institute — a pro-deregulation, industry-backed think tank, to be sure — suggests that, as of Dec. 31, SVB met the liquidity standard with room to spare, and then failed anyway.
Kindleberger and company would have been surprised neither by efforts to tighten regulations in the wake of the 2008 crisis, nor by banks’ subsequent attempts to wriggle out of them — nor by the failure of regulations to control unanticipated risks. A recurring paradox, the book notes, is that “the universal response” to regulatory failure is to call for more, or more effective, regulation.
Yet other methods of tempering greed, fear and groupthink do not necessarily work better. There is undeniable logic to the free-market approach: Let banks fail unchecked, so those responsible pay the cost and the whole market learns not to take excessive risks.
The government did not quite let that happen in the SVB case, however, for the same reason it has rarely let it happen in the past: the potential for a general meltdown, such as the one that Lehman Brothers’ collapse arguably triggered in 2008.
SVB’s shareholders and management — appropriately — got wiped out, but Washington decided to guarantee all $175 billion in deposits at SVB — including the astonishing 90 percent that exceeded the $250,000 legal maximum for federal insurance.
These depositors are not just plucky little start-ups, but include big, sophisticated corporate players: streaming platform Roku, for example, stands to recover $487 million it had parked at SVB. Why shouldn’t such entities pay a price for imprudently putting so many eggs in one basket?
The Biden administration maintains that this is not a taxpayer bailout, because the government paid off depositors from a cash reserve funded by a fee on the financial sector, but that’s a half-truth: It’s essentially a tax on banks they pass along to customers.
Still, if the government’s approach calms markets, enabling the Fed to continue fighting inflation without further crises, this semantic fudge will probably be forgiven and enter history as a footnote, along with the rest of the SVB crash.
If not, there might be a whole chapter about it in the ninth edition of “Manias, Panics, and Crashes.”