News Center



Home News Center News

He Xiaobei: Learnings from SVB Crisis

Mar 21-2023   



The bankruptcy of Silicon Valley Bank (SVB) can be attributed to the bank’s severe management problems as well as loose financial oversight, wrote He Xiaobei, Deputy Director of NSD Macro and Green Finance Lab, in a commentary. The crisis it triggered hasn’t directly impacted on the Chinese market yet, it nonetheless holds valuable lessons for China’s financial supervision, she said.

 

What happened to SVB on those fateful two days was a textbook example of a bank run, which underlines the inherent fragility of banks as they grapple with a mismatch in lending and borrowing durations, He noted. Tech startups, which made up the bulk of SVB’s clients, bore the brunt of the Federal Reserve’s interest increase and started to burn down their cash deposits to maintain operation. That forced SVB to sell long-term assets, mostly held-to-maturity securities that had went down in value in an interest-hiking environment, to cough up cash to satisfy depositors’ withdrawing demands. Panic flared up with regard to the robustness of the bank, triggering USD42 billion withdraw in one single day, amounting to one third of the total deposits at SVB.

 

The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve had taken pre-emptive steps before the crisis broke out, but the market panic proved to be too overwhelming to assuage. He Xiaobei believed that such panic was in effect a distrust in banking oversight. The depositors and investors scrambled to move their savings and assets to large banks in what’s called ‘flight to quality’ phenomenon. Some might also expect the large banks to be too big to fail, He said.

 

The cyclical recession of the tech industry lit the fuse of the crisis, which in turn would further weaken the tech industry and dampen the global economy, said He. Tech startups will find it ever more difficult to raise funds, while even banks in good health will become more cautious in asset expansion.

 

More profound impact will happen to financial oversight, said He. The current banking regulatory framework lowers the compliance costs of small and medium-size banks, resulting in breach of market discipline and the formation of moral hazards. In addition, the prudent regulatory requirements for large banks also deserve reflection and scrutiny, as evidenced by the recent meltdown at Credit Suisse. Overall, He believed that the events will push the US financial oversight to undergo a new round of contraction, with medium-sized banks likely to face more stringent regulatory demands.

 

Therein lie some lessons for China’s financial oversight, said He. Attention should be paid to the risks faced by regional small and medium-sized banks, which tend to have high exposure to certain industries. For example, some city commercial banks might run into asset problems as their clients fail to undergo low-carbon transformation. Another lesson is that the regulatory authorities should put store by stress tests on banks, build a risk monitoring index system, and expand the prudent policy tool kit, so as to avert systemic financial risks. Lastly, He proposed installing a market-based exit system for financial institutions under the Financial Stability Law.

He Xiaobei: Learnings from SVB Crisis

Mar 21-2023   



The bankruptcy of Silicon Valley Bank (SVB) can be attributed to the bank’s severe management problems as well as loose financial oversight, wrote He Xiaobei, Deputy Director of NSD Macro and Green Finance Lab, in a commentary. The crisis it triggered hasn’t directly impacted on the Chinese market yet, it nonetheless holds valuable lessons for China’s financial supervision, she said.

 

What happened to SVB on those fateful two days was a textbook example of a bank run, which underlines the inherent fragility of banks as they grapple with a mismatch in lending and borrowing durations, He noted. Tech startups, which made up the bulk of SVB’s clients, bore the brunt of the Federal Reserve’s interest increase and started to burn down their cash deposits to maintain operation. That forced SVB to sell long-term assets, mostly held-to-maturity securities that had went down in value in an interest-hiking environment, to cough up cash to satisfy depositors’ withdrawing demands. Panic flared up with regard to the robustness of the bank, triggering USD42 billion withdraw in one single day, amounting to one third of the total deposits at SVB.

 

The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve had taken pre-emptive steps before the crisis broke out, but the market panic proved to be too overwhelming to assuage. He Xiaobei believed that such panic was in effect a distrust in banking oversight. The depositors and investors scrambled to move their savings and assets to large banks in what’s called ‘flight to quality’ phenomenon. Some might also expect the large banks to be too big to fail, He said.

 

The cyclical recession of the tech industry lit the fuse of the crisis, which in turn would further weaken the tech industry and dampen the global economy, said He. Tech startups will find it ever more difficult to raise funds, while even banks in good health will become more cautious in asset expansion.

 

More profound impact will happen to financial oversight, said He. The current banking regulatory framework lowers the compliance costs of small and medium-size banks, resulting in breach of market discipline and the formation of moral hazards. In addition, the prudent regulatory requirements for large banks also deserve reflection and scrutiny, as evidenced by the recent meltdown at Credit Suisse. Overall, He believed that the events will push the US financial oversight to undergo a new round of contraction, with medium-sized banks likely to face more stringent regulatory demands.

 

Therein lie some lessons for China’s financial oversight, said He. Attention should be paid to the risks faced by regional small and medium-sized banks, which tend to have high exposure to certain industries. For example, some city commercial banks might run into asset problems as their clients fail to undergo low-carbon transformation. Another lesson is that the regulatory authorities should put store by stress tests on banks, build a risk monitoring index system, and expand the prudent policy tool kit, so as to avert systemic financial risks. Lastly, He proposed installing a market-based exit system for financial institutions under the Financial Stability Law.