SVB Debacle Highlights the Need for Sheltered Banking & the Value of Credit Unions

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Speculation and theorizing abounds about what caused the downfall of Silicon Valley Bank, the largest bank to fail since the 2008 financial crisis. Pundits point to a range of factors that contributed to the demise of what is now the FDIC-administered Silicon Valley Bridge Bank, N.A. Yet the chief lesson to be learned from the debacle is that the only way to avoid similar failures (and their attendant market contagion) is for our banking system to revert to a system of sheltered banking that separates deposits and investments, à la the Glass-Steagall Act.

Some observers have blamed the failure on poor risk controls, such as SVB’s failure to hire a chief risk officer and the fact that its senior management worked from home. Another prevailing theory is that the bank played it overly safe (and paradoxically, compounded its risk), by retaining low interest government debt in a climate of monetary tightening by the Fed. Congressman Patrick McHenry described SVB’s failure as the “the first Twitter fueled bank run,” precipitated by a negative review by Peter Thiel and the ensuing panic among social media savvy tech-bros. Financial reformers blame the downfall on the steady gutting on Dodd-Frank regulations, such as Congress’s 2018 “tailoring” of enhanced prudential standards to essentially exempt companies under $100 billion in assets, like SVB. Others suggest that the bank accrued unwieldy exposures to venture funds, buttressed by recent dilutions to the Volcker Rule and capital/liquidity requirement.