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Following the failure of Silicon Valley Bank, fears of a banking crisis have spread to Europe. Germany’s biggest bank, Deutsche Bank, is the latest financial institution to see its share prices drop dramatically, adding to existing fears of contagion in the banking sector. This follows news that Switzerland’s largest bank, UBS, agreed to buy its struggling rival, Credit Suisse, in a deal worth $3.25 billion.
Ever since the failure of SVB, the question everyone is asking is: Did the U.S. banking laws already on the books fail, or was there a lapse in their enforcement by regulators? According to Straight Arrow News contributor Larry Lindsey, any 11-year-old Monopoly player could answer that question.
First of all, the bank had no Chief Risk Officer for nine months from April 2022 to January 2023. This is very much during the time that the Federal Reserve was aggressively raising interest rates, which are underpinning a lot of the risks that existed in Silicon Valley Bank. Why was there no red flag that they didn’t have a Chief Risk Officer in place? You know, that 11-year-old would know that not having a Chief Risk Officer is just plain risky.
Second, what the bank did was they overbought government bonds, which wouldn’t mature for many years, despite the fact that the people who deposited in the bank were frequently pulling their money out. So in effect, the bank was borrowing short from depositors who could run, and lending long. Again, no 11-year-old monopoly player would do such a thing.
Third, and I think worse, is that this was all done at a period when rates were going up and those rates were determined by the San Francisco Fed. Remember, the Federal Reserve was one of the bank’s regulators. So if I was one of their regulators, and I knew that interest rates were going to go up, wouldn’t I have naturally warned them about being overexposed to long-term bonds where they were going to lose money?
Never happened. Why didn’t the Fed train its supervisors to go into a bank and pay a special attention to that? After all, they were meeting every six weeks to raise rates … didn’t mention it to their supervisors. Although, by the way, the heads of supervision who oversee hundreds of employees certainly should have figured that out without being told. Again, an 11-year-old monopoly player would know this.
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