What did the SVB failure teach us?

“Capitalism without failure is like religion without sin. It doesn’t work.” according to the economist Allan Meltzer, as quoted by Thomas Hoenig in “Another Banking Crisis was Predictable”. If you have been following this story, you know this “capital enterprise” was not allowed to fail.

SVB was risking the accounts of their many depositors with loans to new businesses and investments in long term US Treasuries with higher yields.  They were then forced to sell these bonds at a loss to cover deposit withdrawals.  This in turn caused a panic when SVB acknowledged it didn’t have enough liquidity and regulators were forced to close the bank.

Why would an Independent Lease Finance Enterprise (such as Landmark Financial Corporation) feature this story in their newsletter you may ask?  Just like SVB, LFC is also a source of funding, albeit for the acquisition of capital equipment rather than loans to Tech Start Ups.  What lessons could be learned in this example by any institution in the private sector that provides capital? 

Since the failure of Silicon Valley Bank on March 10, 2023, there have been many explanations as to what went wrong.  Thomas Hoenig, a former President of the Kansas City Federal Reserve who later served as vice chairman of the FDIC from 2012-2018, seems to have the most plausible answer and remedy. 

He cites “Duration Risk” or long-term debt that is sensitive to changes in interest rates as the primary culprit.  The remedy is a “return to a bank-regulatory framework that links risk and reward- sin and religion”.  

Since the Government guaranteed the depositor’s accounts, SVB did not suffer “failure” from the risks they took with their poor investment decisions.  The rest of us who engage in capital finance need to be more cautious as our losses would come directly out of our pockets while any gains would be our reward.  It is pure Capitalism as it should be.

Kevin F. Clune, CLFP
Clune & Company; A Division of
Landmark Financial Corporation