Interview: U.S. regulators "should have acted more quickly on SVB," says expert-Xinhua

Interview: U.S. regulators "should have acted more quickly on SVB," says expert

Source: Xinhua

Editor: huaxia

2023-03-18 11:44:15

by Yang Shilong, Zhang Juan

NEW YORK, March 17 (Xinhua) -- U.S. regulators "should have acted more quickly" on California-based Silicon Valley Bank (SVB), whose sudden collapse sent its depositors into panic and forced Washington to its rescue to set aflame the country's banking system, a financial expert told Xinhua on Friday.

"I agree with the idea that regulators should have acted more quickly on SVB. There were some clear signs that its business was deteriorating starting in November 2021 when its stock price peaked," said Peter Cohan, associate professor of Management Practice at Babson College, a private business school in Massachusetts.

"Once technology stocks began to fall and the Fed raised interest rates, regulators should have foreseen how it would hurt banks overly dependent on a continued flow of venture capital into startups," he said.

SVB had been the 16th largest U.S. bank with more than 200 billion U.S. dollars in assets and about 175 billion dollars in deposits before it failed on March 10. After SVB's failure, another bank, New York-based Signature Bank, followed.

To prevent a total crisis, the U.S. Federal Reserve, the Department of the Treasury and Federal Deposit Insurance Corporation (FDIC) announced a plan on Sunday to fully insure all deposits at the two failed banks, including those above the 250,000-dollar limit covered by traditional FDIC insurance. The additional protection will be paid for out of a special fund made up of fees levied on all FDIC-insured institutions.

"I do not think the federal government moved too quickly. I do think the government was hoping to nip fear in the bud by bailing out all depositors at those two banks," said Cohan.

"I also think the government was trying to punish investors and bondholders of those banks by not bailing them out -- which is what happened during the 2008 financial crisis ... the government is trying to avoid using taxpayer money to bail out the depositors by using the Deposit Insurance Fund which is paid for by the banking industry.

"Unfortunately, I have a feeling that what the government has done so far has not quite worked. I am afraid more will need to happen -- probably this weekend."

Cohan noted that SVB's collapse "would have posed system risk," adding the U.S. banking system is "not 100 percent stable and I do not know whether more banks will fail."

"SVB may be a regional bank -- however, with 209 billion dollars in assets, it is one of the largest banks in the country. So I think letting it fail and wiping out the depositors -- many of which were technology companies both publicly-traded and startups -- would have caused widespread pain among those companies' employees and customers," he said.

"The federal government consists of politicians who want to stay in power. They cannot get reelected if their policies cause significant harm to voters. So the government will make decisions that are designed to minimize suffering -- it is the ultimate insurance company.

"Politicians will sacrifice intellectual purity -- e.g. letting businesses suffer the consequences of bad decisions -- if the pain is too great for people who did not make those bad decisions.

"Because of this, small banks with deposits mostly under 250,000 dollars will be allowed to fail. Large banks will be allowed to fail with a government backstop. In the future, boards of directors should be more careful about how they choose bank CEOs," he added.