Rising interest rates and the end of easy money were two factors in the sudden collapse of Silicon Valley Bank (SVB) and a subsequent stock market run on shares of regional banks. Questions were raised about the safety of the entire U.S. banking industry.
We examine risk in banking, investing and the broader economy.
Federal regulators faced harsh criticism for the latest bank failures. Progressives blamed politicians who eased regulations on medium-sized and small banks. Some on the right claimed that DEI — Diversity, Equity and Inclusion — distracted SVB from focusing on risk management.
Our guest is economist and risk expert Allison Schrager, author of "An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk". She also writes frequently for Bloomberg Opinion and City Journal.
This episode looks at the causes of the recent bank panic and the current outlook for the financial industry.
"Safety is the foundation of finance and it is also how we price risk," Allison tells us in this episode. Everyone assumes that holding government-backed securities is safe. "But long-duration bonds are very sensitive to changes in bond yields." If interest rates go up, "bond prices on long-dated securities go down a lot."
SVB was heavily invested in these securities. But many of its depositors, including tech firms and venture capitalists, were highly sensitive to rate rises. In mid-March, despite reassurances from top executives, SVB's depositors pulled their money out. It was a sudden online version of an old-fashioned bank run.
We look at potential solutions and hazards for investors and the economy, including the perils of inflation, the dangers of groupthink, why investors and bank executives should feel some pain when an institution fails, and the need for risk management that takes a broad range of economic possibilities into account.
Allison recently wrote this about why Silicon Valley is facing rising threats to its business model. The latest column for Bloomberg cautions savers and investors: don't make the same mistake as SVB with your 401k.
Recommendation: Richard plays this word game almost every day: Spelling Bee, a somewhat addictive game from The New York Times.
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