James K. Galbraith in The Nation:
When Silicon Valley Bank went down, many progressives, and much of the media, immediately pointed to malfeasance, special pleading and regulatory failures—a conditioned response with a strong pedigree. But if those were the real causes, then SVB (and Signature, and First Republic) would have been isolated cases. It’s clear now that they were not. A systemic crisis is unfolding—with a systemic cause.
The business model of SVB consisted of an attractive return on deposits, adventurous loans mainly to young companies in the tech sector, perks for big clients to keep their funds in the bank, and large investments in government bonds and mortgage-backed securities. The safety of the bonds worked to offset the risk of the loans, while the bonds’ return covered the cost of deposits—which grew rapidly as client companies and some cash-rich individuals parked their funds at the bank.
SVB’s growth was indeed rapid, but much of that was back in 2021, the pandemic recovery year. The return on deposits was sweet, and the ad said, in a way that is not now reassuring, that SVB is “fundamentally different from other banks.” It’s also true that SVB lobbied successfully for relief from some regulations on the ground that it did not pose a systemic risk. That looks bad, but SVB wasn’t a systemic risk—its peak deposits of $300 billion were a tiny fraction of US bank deposits.
The bank (I was told by an investor) did not have staff—or possibly, business customers—sufficient to lend out the deposits it attracted to the degree usual for larger banks. Hence much of its balance sheet simply converted short-term deposits into long-term securities, which formed about three-fourths of SVB’s portfolio. This—and not problems with loans—brought SVB to grief. By usual indicators (such as late payments or defaults), the loan book was in very good shape—for the moment.
More here.