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Banks are highly regulated, compelled to ongoing reporting and subject to strict regulation and legislative tomes like Dodd-Frank. There are a battery of regulatory bodies overseeing them, from the Office of the Comptroller of the Currency to the Federal Reserve Bank, the Department of the Treasury, the Consumer Financial Protection Bureau, the Federal Financial Institutions Examination Council, and others. Yet, disturbingly, in their collective wisdom, they did not see the confluence of balance sheet composition, high leverage, and no reserve requirement in the wake of the rapid Federal Reserve rate hikes. 

https://mises.org/wire/banking-crisis-being-orchestrated

Steven Cinelli

As a banker and economist, I am riveted by the expeditious demise of Silicon Valley Bank and other institutions. Were these crashes due to bank mismanagement, as many pundits as well as regulators have posited? Were they due to not managing risk, not hedging, and unfettered exposure to sectors of concern? Or maybe something else is afoot, a movement that may have begun a decade ago.

Recall the Great Recession (2008–10), buoyed by a housing and mortgage crisis created by imprudent lending practices, and then the music stopped. In its inimitable wisdom, the government came in legislatively and regulatorily, via Dodd-Frank, crafting what they thought was a belt-and-suspenders approach to avoiding another debacle.

Certain banks were redefined as systematically important financial institutions (SIFI), to be protected at all costs, while establishing a guided risk regimen. Whether due to the additional compliance costs of Dodd-Frank or demographic changes in the market or the need for better economies of scale, we witnessed a consolidation of smaller banks, reducing the gross number from 7,700 to 4,200 over the subsequent ten years.

The US banking system—with its diversity of institutions, from money centers to community banks, harboring in urban and rural settings—is unique on the world stage. We have vastly more banks than any other country, both by design and opportunity. This has contributed to entrepreneurship through local lending, supporting farming communities, and a general competitive economy.

Figure 1: What country has the most banks?

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Source: National Statistical Office, Helgi Library. Asterisks denote data from 2020.

The increasingly reductive nature of this industry doesn’t appear to be just another macroshakeout. Silicon Valley Bank (SVB) was a well-run institution, yet within days, it went from hero to zero. CEO Greg Becker and his team were accused of mismanagement, including being accused of precipitously monetizing stock options.

Hopefully, a little perspective will be insightful.

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