Good Regulator, Bad Regulator

An SVB ATM outside a Silicon Valley Bank branch in Santa Monica, California on March 20, 2023. (Photo by Patrick T. Fallon/AFP/Getty Images)

When we talk about regulation, we tend to talk about whether an industry is heavily regulated or lightly regulated, and our progressive friends have a tendency to claim that an industry has been “deregulated” even when the number and pages of regulations on the books is greater after the “deregulation” than it was before. 

Rather than talk about whether we have too much or too little regulation with regard to any given industry or activity, we ought instead to talk about whether we have good regulations or poor ones. You’d think that would be obvious enough, but, judging by our political debate, it is not.

Take the recent turmoil in the banking world following the collapse of Silicon Valley Bank. The troubles at SVB were not particularly complex or unforeseeable: The bank had an unusually large share of its capital locked up in U.S. Treasury bonds, which are generally considered the gold standard of low-risk, bulletproof investments—and they are that, most of the time.

The problem at SVB was (allow an English major to simplify, but only slightly) that they had bought those bonds at a time when interest rates were very low, which made those bonds liable to lose much of their value if interest rates were to increase—say, as part of a Federal Reserve campaign to beat down inflation. The term of art is “interest-rate risk,” but what’s really meant in this case is that nobody wants to buy U.S. Treasury bonds paying 2 percent if the same U.S. Treasury, backed by the same full faith and credit of the United States government, is offering identical bonds at 5 percent. Banks have to keep some savings (“capital cushion”) on hand to be able to pay depositors who want to withdraw money, and the value of SVB’s capital crashed as the Fed raised interest rates.

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