Newswise — The rapid collapse of Silicon Valley Bank, the second-largest bank failure in U.S. history, has caused ongoing worries about the stability of the nation’s banking system even as federal authorities step in to manage the crisis. Further anxieties arose with the federal takeover of cryptocurrency-focused Signature Bank — the third largest bank failure in U.S. history.

Virginia Tech finance professor George Morgan explains that Silicon Valley Bank had a distinct business model, not like a typical bank.  “Bank regulation does not need a big overhaul, nor do individual depositors in retail banks need to take any additional action to be safe.”

Morgan says the atypical business model directly contributed to the bank’s failure. “The SVB situation is one of concentrated risks of two types — interest rate risk, due to a duration mismatch between long-term assets and short-term liabilities, and credit risk, through lending to borrowers with a greater chance of payment delays or outright default. Few other banks have anything similar in scale or concentration.”

“The clients of SVB belonged mostly to one industrial sector, tech startups, that were burning through their cash stockpile faster than expected. That made the bank vulnerable when those clients withdrew their deposits in response to the bank’s unusual ‘mid-quarter report’ that provided more details on the bank’s status while soliciting new equity investors,” Morgan said. “The tech startup risks need to be controlled better, but being a bank chartered in California, there was slack cut for them.”

Despite the continuing economic worries, the immediate crisis was quickly resolved. “The typical process to resolve closures has for almost all banks protected all the depositors. The FDIC either takes over or via an ‘auction’ finds a buyer who assumes all the deposit liabilities. That guarantees the security of deposits, not by some declaration, but by action. The SVB case is really no different,” Morgan said.

“The new wrinkle is adding the new emergency term loan facility for them and other banks,” Morgan said, noting that the swift federal intervention raises long-term policy questions. “Should the government be pumping money into the system at this point? Is the added layer of action going to create problems in the future, including emboldening banks and companies to take more risk?”

About George Morgan
The Truist Professor of Finance for Virginia Tech’s Pamplin College of Business, Morgan focuses his research on the decisions regulators should make when faced with issues related to disciplining banks, as well as on the use and risks of futures trading, and the management and regulation of commercial banking organizations. Read his full bio here.

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