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Ideas Made to Matter
After SVB, what’s next for regional banks? 3 takeaways from MIT Sloan
In the wake of failures of Silicon Valley Bank, Signature Bank, and First Republic Bank, policy experts continue to unpack what happened with the hope of avoiding a repeat occurrence or deepening crisis.
SVB, the first to wobble in March of this year, was at the time the largest U.S. bank to collapse since the 2008 financial crisis. A popular banking choice among startups, SVB failed due to poor management, weakened regulations, and weak government supervision, according to recent reviews conducted by the Federal Reserve, the Federal Deposit Insurance Corp., and the U.S. Government Accountability Office.
In two separate talks, MIT Sloan professors andand visiting professor Eric Rosengren, discussed the reasons for the failures and debated what regulatory actions, if any, would help. Here are some of their takeaways.
Poor management is primarily to blame
While the collapse of SVB appeared to be a sudden event, the bank had in fact received 31 citations from the Federal Reserve dating back to 2019 over issues of safety and soundness, according to a Reuters review of central bank documents.
In a March 14 panel discussion hosted by the MIT Golub Center for Finance and Policy, Rosengren, a former Federal Reserve Bank of Boston president and CEO, placed most of the blame on SVB itself, calling what happened “a management mistake.”
The bank made a bet on interest rates staying low and invested in long-term government bonds; when rates rose instead, SVB opted to sell $21 billion of bonds at a $1.8 billion loss. Its cash-sensitive customers, already nervous about the slowing flow of venture capital, made a run on the bank.
“This was not a small bank,” Rosengren said. SVB had $209 billion in assets and should have had “a very good grasp of its asset liability mix of what kind of duration risk it was taking. In the end, a big question is how you could have a $200 billion bank that didn’t have the asset liability management right and didn’t get the interest rate risk right.”
Parker, a co-director of the Golub Center and co-director of the MIT Sloan Consumer Finance Initiative, noted that the type of balance sheet SVB had “is not uncommon in banks,” which likely points to trouble elsewhere in the sector. In fact, First Republic — like SVB — showed a significant gap between the fair-market value and balance-sheet value of its assets.
Although these banks could hedge their interest rate risk, “most of them have not,” Parker said.
“Bank accounting is a mess”
Lucas, who is director of the Golub Center, said that SVB’s failure reflects that “bank accounting is a mess.”
More transparent balance sheets would help. “Why can’t we see the hedged positions of these banks?” she asked. Secondary market lenders Fannie Mae and Freddie Mac have consolidated their derivative positions onto their balance sheets so regulators can actually see what is going on, she said.
Along those lines, since the collapse of SVB, some bank executives and investors are reviving calls for changes to U.S. accounting rules around held-to-maturity securities.
In an April 13 presentation hosted by MIT Sloan Executive Education, Rigobon called bank accounting “complicated” and “very counterintuitive,” especially when it comes to capital gains and pricing.
“In banks, you have an asset, and if the asset appreciates, you have a gain, and then you realize the gains in the form of capital gains,” said Rigobon, who teaches Understanding Global Markets: Macroeconomics for Executives.
“If there’s a loss, you have to realize the losses, and that has implications on regulation and the required equity in the bank. Some bank accounts were exempt of this simple process,” Rigobon said. “That is a job of a regulator and should be done by a regulator.”
The industry needs more supervision
Lucas said she doesn’t foresee big legislative changes in the wake of the event. “Congress is pretty gridlocked,” she said. However, she added that she hopes regulators give some of the existing rules a second look.
What’s needed specifically is a reexamination of the rules around mark-to-market accounting and making sure that balance sheets are completely transparent. “I doubt this is going to happen, but I hope is there’s some rethinking of some of the rules, which are kind of messed up, rather than just layering new regulations on top of them,” Lucas said.
Rigobon raised issues around a 2018 law that raised the threshold whereby a bank would be considered too big to “need to be regulated” — from $50 billion to $250 billion in assets. This allowed certain regional banks to grow without having to abide by additional compliance or annual stress testing. “I hope that they change the threshold back down,” he said.
Rosengren predicted that the supervisory review process, which encourages banks to develop sound risk management techniques, will change.
“Regulations that are adopted by the Fed may change, but the supervisory process I’m very confident will change, and that’s probably a good thing,” Rosengren said. “They should have caught this.”
Watch a replay of the Golub Center panel
Watch the MIT Sloan Executive Education webinar