Odd Lots The Regulatory Blunder That Gave Us the Silicon Valley Bank Disaster
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Mar 16, 2023 Lev Menand, a Columbia Law School professor and expert on banking regulation, dives into the Silicon Valley Bank collapse. He discusses the regulatory failures that allowed banks to pursue reckless growth without oversight. Menand highlights historical shifts in financial regulations and the dangers of recent changes that weakened scrutiny on smaller banks. The impact of rising interest rates on banking stability and the role of federal home loan banks also take center stage. His analysis emphasizes the need for stronger regulations to prevent future financial disasters.
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Regulatory Failure at SVB
- Silicon Valley Bank (SVB) failed due to regulatory failures, both in terms of bright-line rules and discretionary supervisory oversight.
- SVB exploited risk-weight capital rules by holding a lot of long-dated treasuries, building substantial interest rate risk without needing more capital.
Broken Supervision
- Current bank supervision is broken because it focuses on processes and procedures, not substantive risk assessment.
- Regulators check for proper risk management processes, but don't judge the actual risk decisions, leading to failures like SVB.
Shift to Shareholder Discipline
- In the 80s, rising interest rates caused banks to become undercapitalized, leading to lawsuits and new capital regulations.
- Alan Greenspan, as Fed chair, shifted supervision towards shareholder discipline, believing they would manage risk better than regulators.