Transcript: What we learned from the collapse of SVB

This is an audio transcript of the FT News Briefing podcast episode: ‘What we learned from the collapse of SVB’

Saffeya Ahmed
Good morning from the Financial Times. Today is Monday, March 11th, and this is your FT News Briefing.

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Private equity is sitting on a record number of unsold companies. And big changes are coming to the US Treasury market. Plus, a year after the collapse of Silicon Valley Bank, US banking is still on shaky ground.

Stephen Gandel
There’s not just one way banks fail. So I think the lesson is, is that regulators need to look at all the different ways banks can run into trouble.

Saffeya Ahmed
I’m Saffeya Ahmed, in for Marc Filippino, and here’s the news you need to start your day.

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Around this time a year ago, the banking world was in crisis. Silicon Valley Bank had just collapsed and it was soon followed by two other regional banks, First Republic and Signature. So what lessons can we take from that time? Here to answer that question is the FT’s US banking correspondent, Stephen Gandel. Hi, Stephen.

Stephen Gandel
Hello.

Saffeya Ahmed
So first off, can you remind us what caused the banking crisis a year ago?

Stephen Gandel
Sure. We had kind of the double whammy during the pandemic, you had these ultra-low interest rates, and at the same time, to get people through the pandemic, the government had passed all this assistance, not all that could be spent during lockdown. So a lot of that money ended up in banks. And then, you know, we have the vaccine, the lockdowns are over, people are out, they’re spending and we get this massive spike in inflation. The Fed reacts. They raise interest rates very quickly starting in early 2022. Now the problem is that all that money that banks got from people, they put into bonds. And when interest rates rise very quickly, those bonds lose hundreds of billions of dollars, and that was Silicon Valley Bank. People go to get their money and we have a run on the bank. And it turns out that there are other banks that were taking risks with depositors’ money. They also ran into trouble. And so those banks had to be bailed out as well.

Saffeya Ahmed
So how did all this end up getting fixed?

Stephen Gandel
Well, the government has a mechanism for this. When banks fail, there’s something called the Federal Deposit Insurance Corporation, and it has a fund which rescues banks and insures the deposits of average Americans. When banks failed, they said, OK, we’re not just gonna insure the deposits that we normally insure up to 250,000. We’re gonna insure all the deposits. So anyone in one of these failed banks, whether it was Silicon Valley or whether it was Signature or whether it was First Republic, they got all their money back. On top of that, the Fed opened up a bunch of different emergency lending. The Fed made it possible for the banks to get the money that they needed to pay back depositors. And once the depositors felt comfortable that they weren’t gonna lose their money either because the FDIC was gonna back them or because the Fed was gonna give banks the money they needed, then the crisis was over, I would say. It started in March, and by May and June, people started to feel better about their local bank again.

Saffeya Ahmed
And as you said, this started in March last year. So it’s been just about a year. Are things any different now?

Stephen Gandel
Not really, because the thing that was at the heart of the banking turmoil we had, banks were failing for reasons that they hadn’t failed before. The way regulators usually protect banks or make sure banks are safe, it has to do with making sure they have enough capital money to cover loans that go bad. But Silicon Valley didn’t fail because they had loans that were bad. In fact, they didn’t lend a heck of a lot. They failed because they had made investments that went bad and regulators hadn’t been watching that as much. And so there hasn’t been a lot put in place yet to protect banks from those other risks. We just saw this one bank, New York Community Bank, starting in late January, it started to falter because it hadn’t put enough money away to cover this growing problem that it and lots of other banks have with commercial real estate. Loans made to office buildings that many of which are now empty and many of which are worth a lot less, and their owners are gonna possibly default. And it’s not clear the banking system is ready for all those losses.

Saffeya Ahmed
So what kind of lessons did we learn from the banking crisis last year?

Stephen Gandel
I think what we learned is that there’s not just one way banks fail. So I think the lesson is, is that regulators need to look more broadly and look at all the different ways banks can run into trouble. And they’re starting to do that, but we’re still fighting actually over the rules that were put in place after the financial crisis, which, again, didn’t really address what happened with Silicon Valley. And it’s only now you’re seeing regulators start talking about liquidity. So when there are moments of crisis, there’s money there for depositors to get.

Saffeya Ahmed
Stephen Gandel is the FT’s US banking correspondent. Thanks, Stephen.

Stephen Gandel
Thanks very much.

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Saffeya Ahmed
Private equity is in a dealmaking rut. Globally, PE groups are sitting on a record 28,000 unsold companies worth more than $3tn. That’s according to consultancy firm Bain & Company’s annual private equity report. PE groups are struggling to sell these companies ever since high interest rates pushed up financing costs. But there are some signs that things could turn around, at least when it comes to PE’s usual exit route, which is companies going public. Last week, the German beauty retailer Douglas, a company that’s backed by a private equity group, announced plans to list in Frankfurt. And the dermatology company Galderma also said it was looking to list on the Swiss stock exchange.

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So the US Treasury market is the biggest and most liquid in the world. But in recent years, it’s been on shaky ground. And that’s scaring regulators, so much so that they’re putting in place some new rules in order to sleep better at night. Here to talk to me about them is the FT’s Kate Duguid. Hey, Kate.

Kate Duguid
Hey.

Saffeya Ahmed
So why are regulators so concerned about the US Treasury market? I mean, what are some of the problems that they’re seeing?

Kate Duguid
So I think the most important thing to establish is that almost every investor around the world holds Treasuries. That includes foreign governments, it includes foreign central banks. The Treasury market kind of touches everything. And so because it’s so central, problems there create problems elsewhere. In the past decade or so, we’ve had three major crises. There was one in 2014, one in 2019, and then there was one at the start of March 2020. And in each of those instances, functioning in the Treasury market got messed up. What happened was that it became much more difficult to buy and sell Treasuries in that market. And in two of those instances, in 2019 and in 2020, both of these required emergency interventions. So the Federal Reserve and the New York Fed both had to step in and pump a bunch of cash into the market to calm everybody down. And so because of these instances, regulators have decided that now is the time that they need to start cleaning things up a little bit.

Saffeya Ahmed
And how exactly are they trying to do that?

Kate Duguid
So there have been two rules, two huge rules that have been passed by the Securities and Exchange Commission (SEC) in the past couple of months. One is called the dealer rule and one is called the central clearing rule. In the dealer rule, it sort of forces maybe some hedge funds, but a lot of sort of big high-speed traders, to register with regulators. And so it will provide more oversight of those firms. And then with central clearing rule means that every single transaction, or most transactions, I should say, in the Treasury market will now have a third independent party that will kind of govern the transactions. These central clearing houses take collateral from both the buyer and the seller, and they ensure that in the event of a crisis, everybody gets their money back.

Saffeya Ahmed
So a clearing house is basically like your fail-safe for financial transactions in this market?

Kate Duguid
Yeah, that’s a good way to think about it.

Saffeya Ahmed
OK. So it seems like they’ll play a pretty important role when it comes to the SEC’s new rules for the Treasury market. What’s the downside to that?

Kate Duguid
So a clearing house really has to work well. One thing that is going to happen is that we’re gonna see a bunch of Treasury trades concentrated in probably a single clearing house, maybe two. So those clearing houses then become vulnerable. There is a certain amount of concentration risk there. There could be, for example, a hack of one of them, which would have huge repercussions, right? If all Treasury trades are going through the same clearing house and there is some kind of cyber attack there, that could be a pretty unmitigated disaster.

Saffeya Ahmed
Wow. OK, so what exactly is at stake here if these new rules aren’t implemented successfully?

Kate Duguid
Because the Treasury market is so essential to the functioning of the entire global financial system, anything that, like, screws up functioning in the market is a really big problem. And an improper rollout of a new rule, or the creation of a new institution that doesn’t work perfectly could threaten this very vital market and cause problems across the board. So it’s gonna be extremely, extremely important that these happen kind of slowly, cautiously, that all this is done well.

Saffeya Ahmed
Kate Duguid is a US capital markets correspondent for the FT. Thanks, Kate.

Kate Duguid
Thank you so much.

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Saffeya Ahmed
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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