Silicon Valley Bank collapse stemmed from a liquidity crisis: Former SEC advisory committee chair
While there’s "widespread panic" around the swift fall of Silicon Valley Bank (SVB), it’s unclear whether other U.S. regional banks are in the same situation, according to a former chairman of the U.S. Securities and Exchange Commission’s Advisory Committee on Financial Reporting.
Robert Pozen, senior lecturer at MIT Sloan School of Management, and former chairman of MFS Investment Management and Fidelity Investments, said he’s not sure if other smaller U.S. banks are having a similar liquidity crisis to SVB.
“I mean there is widespread panic but it's unclear to me whether these other regional banks are really in the same situation as SVB,” Pozen said in an interview with BNN Bloomberg on Monday.
“They’re clearly not, in the sense they haven't had this huge influx of uninsured depositors who are very concentrated, and second of all, the regulators hadn't announced that they were going to protect uninsured depositors. So I think those are two factors that should help them a lot, the other regional banks.”
Last week, SVB became the largest U.S. lender to fail in a decade. Regulators took possession of the bank and it was put into receivership under the Federal Deposit Insurance Corp.
This comes after SVB had an unsuccessful attempt to raise capital and the bank faced a mass cash exodus from technology start-ups. As of last year, the company was valued at more than US$40 billion and it had quadrupled in size over the past five years.
Pozen said it’s important to note that this is a “very different situation than we had in 2008, where we had credit defaults.”
He said this situation is a “liquidity crisis” because there was a mismatch between the huge influx of deposits in 2021 and 2022, and “in order to make a positive spread, they bought long-term treasuries and that mismatch is what brought it down.”
Pozen added that this was an unusual case for a regional bank.
“I think this case is unusual because 80-to-90 per cent of the deposit at SVB are uninsured so we rarely see such a large percentage of uninsured,” he said.
“In terms of the Fed [U.S. Federal Reserve] taking collateral at face value, well that is unusual; usually they have more of a market orientation so that's part of the Fed’s attempt to head off a liquidity crisis in other regional banks. It's giving them new sources of liquidity without having to sell these treasuries at a loss.”