Fallout from the Banking Failures

There has been a lot of discussion about the events leading up to the failure of Silicon Valley Bank. It has been widely accepted that this was a textbook case of bank mismanagement, and most people seem to agree. However, it is important to understand if there were things that regulators or supervisors could have done to prevent this outcome.

One issue that needs to be examined is the behavior of uninsured deposits in Silicon Valley Bank and other failed banks. Deposits moved out of these institutions at a speed and volume never seen before, which highlights the need for different liquidity requirements for banks. The regulators and supervisors need to determine what caused these deposits to behave differently and take corrective action.

Supervision across the financial industry needs to change, with a focus on prioritizing risks instead of compliance check-the-box operations. The regulators need to focus on the most important risks and address them promptly. Silicon Valley Bank had 32 issues requiring attention, but they were for things that did not matter for the bank. There was no prioritization among them. This is a problem that needs immediate attention.

The structure of the Fed also needs to change. They need to ensure that all banks are prepared to borrow from the Fed if they need to. They need to provide liquidity to banks and the financial sector during crises, instead of requiring them to sell their assets into the market.

Overall, it is crucial to address these issues to prevent another failure like Silicon Valley Bank’s. The regulators and supervisors need to prioritize risk, focus on the most important issues, and provide liquidity to banks and the financial sector during crises.