SVB Took the Wrong Risks
Also banking as mystery, SVB as securities fraud, and Credit Suisse found some weaknesses.
I don’t think that anything interesting turns on whether or not this weekend’s resolution of Silicon Valley Bank was a “bailout,” so let’s not discuss that.1 But when people talk about bank bailouts, what they often mean to talk about is moral hazard, the idea that if the government saves people from the consequences of bad bank behavior, that will encourage more bad bank behavior in the future. And that seems worth talking about.
It is, I think, fair to say that Silicon Valley Bank took some bad risks, and that’s why it ended up failing. It is a bit harder to say exactly what SVB’s bad decision was. A simple answer is “it made a huge bet on interest rates staying low, which most prudent banks would not have done, and it blew up.” Yesterday Bloomberg reported that “in late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in,” to reduce its duration risk, but that would have reduced earnings, and so “executives balked” and “continued to plow cash into higher-yielding assets.” They took imprudent duration risk, ignored objections, and it blew them up.