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The world of finance is no stranger to controversy, and recent bank failures have attracted significant attention. Analysts and industry insiders are divided over the nature of the incidents — some allege a coordinated attack on the banks, while others dismiss such claims as baseless conspiracy theories.
Proponents of the coordinated attack theory argue that the crisis which brought down SVB Financial Group, Signature Bank and Silvergate Capital is not coincidental, but rather the result of a deliberate and targeted action by U.S. regulators.
Analysts at Weiss Ratings, along with former U.S. Rep. Barney Frank and Rep. Tom Emmer, are among those contending that these three banks, known for having business connections to the crypto market, were singled out by crypto-hating federal regulators.
There’s another theory — one of a broader crisis in the financial system. Its proponents claim that the collapse of Silicon Valley Bank was triggered by a classic bank run, with customers pulling their money out before U.S. regulators intervened. This led to a chain reaction that affected other banks, including Signature, which had an unusually high ratio of uninsured deposits. First Republic Bank was also teetering on the brink as customers withdrew their deposits.
The crisis also impacted the many startups that relied on Signature Bank and Silicon Valley Bank for financial services, casting doubt on their future.
The rescue efforts by central banks and the banking industry have been extensive. Banks have borrowed a record amount from the Fed, smashing records set during the 2008 financial crisis. The rescue efforts indicate deeper trouble within the financial system rather than a targeted attack on specific banks.
“ The amount of corporate mismanagement is astounding. ”
Regardless of which camp you’re in, there’s one aspect of the current bank crisis both sides agree on: the amount of corporate mismanagement is astounding.
SVB, the parent of Silicon Valley Bank, is the most egregious. Said Gavin Magor, a Weiss Ratings analyst (Disclosure: I am a full-time contractor for Weiss Ratings.): “SVB was deep into a completely mismatched bond portfolio when they knew what the Fed was doing with interest rates. That does not reflect well on them. Furthermore, they were aware that customers were taking cash out as their businesses needed, but continued in their bond-centric investment strategy.”
Read: No regulation or law can fix incompetent bank management, former FDIC chief says
As for systemic risk, both the coordinated attack and system collapse theorists acknowledge an increase in economic risk due to the banking crisis. They only disagree on what caused it.
Said Juan Villaverde, a senior Weiss Ratings analyst: “If you force a bank to shut down through allegations and semicoercive action, you will scare the daylights out of depositors, especially if you don’t hear a peep from regulators.”
“ SVB, Silvergate and Signature aren’t isolated examples. ”
This is the systemic nature of the problem, and why Villaverde believes that SVB, Silvergate and Signature aren’t isolated examples. “The banking system has massive losses on its bond portfolios,” he says. “As we learned in 2008, hedging doesn’t work. It merely spreads the risk around.”
For stock investors, the failures of Signature Bank, Silvergate and SVB are a reminder of the risks involved in investing in shares of traditional financial institutions. Make sure your due diligence is thorough and assess the financial health and stability of any institution before investing.
More: 24 bank stocks that contrarian bottom-feeders can feast on now
Plus: Failed banks struck a $22.5 billion blow to the deposit insurance fund. Who will pay the price?
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