Coming, as it did, right between the liquidation of Silvergate Capital and the closure of Signature Bank, the collapse of Silicon Valley Bank (SVB) is a signal of more pervasive systemic risk and fragility in the banking system. The subsequent travails of First Republic Bank and, across the Atlantic, of Credit Suisse make it clear that the scope, scale, and interconnectedness of global finance have grown to a point where the failure of even a midsize regional bank can trigger worldwide contagion and spillovers.
Silvergate Capital and Signature Bank were implicated in the world of cryptofinance and had been derailed by the crypto meltdown and the spectacular unraveling of the FTX Exchange and Alameda Research, headed by Sam Bankman-Fried, which were clients of both institutions. They have come under scrutiny for their role in facilitating the siphoning of customer deposits from the crypto exchange platform FTX to its affiliate hedge fund Alameda. But compared to Silvergate and Signature, SVB was a more conventional bank, dealing in loans and deposits for niche IT and health start-ups in California. Its depositors were much-celebrated “tech innovators,” and it put its money in safe long-term assets like US Treasury and agency bonds. So, what went wrong? And what does the seizure of SVB indicate about the present conjuncture?
Monetary Policy Does an About Face
The financial system emerged, resurgent, from the convulsions that seized financial markets and big global banks in 2008 after the house of cards built on the edifice of subprime home markets crumbled with the collapse of Lehman Brothers. Extraordinary emergency interventions by the US Federal Reserve were singularly effective in restarting the engines of credit. The unconventional policies entailed a massive expansion of the Fed’s balance sheet as it bolstered its safety net to backstop the shadow banking system — the market-based mechanisms transforming illiquid and risky subprime mortgages into tradable assets.1 Such interventions brought these mechanisms out of the shadows, entrenching their role in the essential plumbing of the credit machinery. The financial landscape became even more consolidated and concentrated in the aftermath of the banking system shake-up that left four large global banks — Citibank, Bank of America, JPMorgan Chase, and Goldman Sachs — dominating the sector.
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