Recent collapse of banks in the US especially Silicon Valley Bank (SVB) speaks about the fundamental problem inherent in our economic system- herd mentality. As pundits’ point out the collapse of SVB through an asset liability mismanagement looking at the duration of portfolio assets in a rising interest rate scenario, the behavioral of depositors leading to the bank run must be showcased. Depositor withdrawal led to the collapse of the Silicon Valley Bank over a period of two days. An excellent paper titled Hyman Minsky and Behavioural Finance by Steven Pressman exalts the thinking of Minsky. Minsky emphasis on the tyranny of human psychology governing periodic cyclical financial crisis and need for strong regulation of the banking and financial services sector is not lost to the world. The recent bank run of SVB highlights the amplifying effect of volatile investor psychology on the economic cycles governing the global financial markets.
Silicon Valley Bank A Snapshot
Nearly half of U.S. venture-backed technology and life science companies banked with SVB. SVB had $212 billion in assets with total client funds of $342 billion. The bank had a healthy 12.14% of return on equity in FY22. Established in 1983, SVB’s listed on Nasdaq in 1988; global expansion started in 2008. Over the years, SVB acquired investment banking, investment management, and wealthmanagement businesses, and launched nasdaq Private Market with Nasdaq, Morgan Stanley, Citi, and Goldman Sachs. In 2022, the bank announced an ambitious plan to provide $5 billion in #sustainablefinance and achieve carbon-neutral operations by 2025. At the end of quarter fourth 2022, the bank had a net income of $275 million or $4.62 per diluted common share. SVB stock reached a high of $755.03 on 03/11/2021, falling to $106.04, a loss of 612% before the bank was shut down.
Looking at SVB financial group results 2022 fourth quarter financial results. Interestingly, weighted-average duration (in years) 6.2 for Dec 31, 22 and 6.3 for Sept, 2022 three months ended compared to 4.1 Dec 31, 2021. This is for held to majority security. This is surprising as duration defines sensitivity of bonds. The more the duration the more the price sensitivity. If interest rates are rising, the prices fall, so its always better to reduce the duration of the bond. Even for available for sale securities the duration increased to 3.2 for Dec 31, 2022 compared to 2.4 Dec 31, 2021. Technically with aggressive rise in #interestrates on the back of inflation, SVB should have done the opposite. This investment strategy is questionable.
In times of exuberance, speculative lending termed Ponzi Finance by Minsky, creates unwanted problems with exponential increase in debt levels. This increase in debt leads to spiraling collapse when the payback of debt cannot be serviced. If central bank is the lender of last resort, and Minsky’s noble thought of making government as employer of last resort i.e., public sector providing job to anyone who is unable to find one in the private sector brings a contradiction in a market driven economy. This move no doubt increases the wages above the minimum wage for private sector employees but becomes a herculean task for the government especially during recessions. Financial crisis automatically increases government outflow through unemployment insurance, and bank runs further amplifies the problem and the dilemma. Whether central banks should protect depositors above the threshold insured value ? As the list of financial crisis remains unabated from the Great Depression, Savings & Loan Crisis, Black Monday, LTCM to the Asian Financial, Chinese Stock Market Crash, Credit and European Sovereign Crisis, the world needs to start looking beyond tougher regulations – the role of behavioural finance needs to be positively looked within policy making. With behavioural finance gaining traction, Hyman Minsky’s contribution as a founding father of behavioural finance remains noteworthy and futuristic.
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Silicon Valley Bank data as of December 31, 2022.