| > A regulator liable for ALL the deposits becomes responsible for ALL the assets. Regulators are generally conservative, and loans to new companies with strange ideas and no track record don't look so good to them. SVB's underwriting of startups depended on regulatory freedom to take risks not entirely understood by regulators, with corresponding risk that those loans might fail. Some career bureaucrat will not look kindly on a bunch of loans to the likes of nextbigthing.com. SVB wasn't making those kinds of loans to startups and it wasn't risky loans that blew it up. The problem is that its model of deposits was startups which would get backed by $5M-$50M all at once and then need to draw that down over time. The problem comes when VC funding dries up completely and then there's no new deposits to replace everyone burning through their cash. They did take mortgage debt back in mid-2021, but it was not particularly controversial mortgage debt -- however due to rate increases in mid-2022 it went underwater on a mark-to-market basis. This wouldn't have been a problem if they could hold to maturity, which is what they stated they intended to do (and which they probably did intend to do) but the drawdown in deposits forced them to sell some of these to raise cash and forced them to book those losses. The weird risk here was really the way the deposits all dried up and the cashflow out of the bank became strongly negative due to economic conditions of the depositors. The whole business model of the bank had a baked-in bank run that would happen. That isn't really a normal kind of risk, though, and not something that is typically regulated or anticipated by anyone. The actions to close down the bank and take it over and insure the depositors seems fine to me. The moral of the lesson seems to be that bigger banks need to have startup-oriented divisions that will accept this business and absorb those cash flows inside the scope of a much larger bank. You can't have one bank that takes all the deposits of something volatile like VC funded startups. I don't know how you regulate that though other than the Fed explaining to the major banks like JPM that this kind of thing can't happen again so they need to start serving VC companies. |