Shulmaven Way Ahead of the Fed on Silicon Valley Bank Failure

Why did it take more than a month for the Fed's autopsy of the Silicon Valley Bank (see below) when this blogger had it figured out as early as March 11, 2023?

From the "Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank April 2023," Released April 28, 2023

"1. Silicon Valley Bank’s board of directors and management failed to manage their risks;

 2. Supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity; 

 3. When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough; and 

 4. The Board’s tailoring approach in response to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach."

From Shulmaven March 11, 2023 Shulmaven: Random Thoughts on the Economy and the Stock Market - No. 3

* Last week a black swan flew over the markets in the form of the failure of the Silicon Valley Bank (SIVB) with assets of $211 billion, making it the second largest bank failure in U.S. history. Although shorts were hovering over the stock for awhile, the suddenness of the collapse shocked the markets. The failure was the result of two cardinal sins of banking: 1) like an early 1980's S&L the yield on its assets were far below its funding cost due to the rapid rise in interest rates and 2) like the Texas banks of the 1980s its assets and deposits were concentrated in one industry; oil in the case of Texas and technology in this case.

Thus far, unlike in 1984 when the FDIC bailed out all of the creditors of the Continental Illinois National Bank, with $40 billion in assets and the it being the 7th largest bank in the U.S., Silicon Valley depositors above the $250k insurance threshold (87% of the deposits) will have to wait in line to get paid out of the receivership. Thus there are more than a few companies that will not be able to meet payroll. Just to note the Continental Illinois bailout gave rise to the term "too big to fail."

From Shulmaven, March 18,2023 Shulmaven: Random Thoughts on the Economy and the Stock Market - No. 4

*- This episode represents a complete failure of the bank regulatory apparatus in that Silicon Valley's 86% deposit growth in a year represented an unmistakable yellow flag. Further, the bank invested those deposits in long duration assets which should have been viewed as a per se violation of safe and sound banking practice. That would have triggered either the closing of the bank or the firing of its officers. I can't wait to hear the testimony of the regulators from the FDIC, the San Francisco Fed and the State of California testifying before Congress.

And don't forget Shulmaven April 2, 2023 Shulmaven: Winter Comes to the Bank Stocks

My guess is that when the Federal Reserve adopts new stress tests it will include the hitherto omitted interest rate risk as a key criterion. If that criterion were included it is highly likely that at minimum BAC would be prohibited from buying back stock and increasing its dividend. In fact the Fed might require the bank to cuts its dividend and increase its equity capital. Why? On a mark to market basis BAC currently has book equity capital/assets ratio amounting to a meagre 5.4% compared to its accounting book value of 9.0%.