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Gregory Becker. 2015 US Department of Labor. via Wikimedia Commons. |
In a New York Times article by Rob Copeland, Gregory Becker, former Silicon Valley Bank (SVB) CEO, defended his actions before a Senate Banking Committee hearing regarding the bank's failure. Becker deflected blame onto regulators, the media, and inflation-induced interest rate hikes. SVB's downfall, fueled by large investments in low-yielding government bonds and a high proportion of uninsured accounts, has triggered a debate around banking regulations. Becker, who earned nearly $10 million in 2022, faced questions about his compensation and potential return of bonuses. Senators critiqued his failure to accept personal responsibility.
An Economist article, "The prop-up job", provides an in-depth analysis of SVB's collapse. The authors posit the bank's rapid downfall exposed signs of instability in the U.S. banking system, despite post-financial-crisis regulations. The article highlights the implications of abandoning the "Lombard Street" rule of central banking, leading to potential instability. It also draws parallels to the banking crises of the 1980s under then-Fed chairman, Paul Volcker. According to historian Peter Conti-Brown, rising rates subtly affect interest-rate and credit risk, and can strain borrowers. The authors suggest that the banking system is more vulnerable than previously thought and smaller banks, especially those with uninsured deposits, may need to increase capital soon.
The "Lombard Street rule" or Bagehot's dictum, articulated in Walter Bagehot's "Lombard Street: A Description of the Money Market", argues for the Bank of England's role as a lender of last resort during financial crises to maintain stability. Bagehot proposes that in times of panic, the bank should offer high-rate loans to solvent firms against good collateral, ensuring sufficient reserves to meet demands and deter non-serious borrowers. This approach has significantly influenced modern central banking policy.
The breakdown of Bagehot's dictum has a predictable result, illustrated in Bagehot's other great work, "The English Constitution." There, he details the vital role the House of Commons plays in the British political system. Bagehot positions the Commons, including the Cabinet formed from it, as the power center reflecting the electorate's will, controlling fiscal matters, and determining legislation. Additionally, the Commons facilitates communication between the government and its people, conveying public opinions, desires, and grievances to the state and justifying state actions and decisions to the public.
Becker's congressional hearing underscores the significant role of Congress, the American equivalent of the Commons (Senate and House both being subject to popular elections) in addressing banking sector instability. This step opens a much-needed debate on banking regulations. Although the hearing was marked by partisan disagreements, it offered an opportunity to question actions leading to SVB's failure and to assess executive accountability. As Bagehot stressed, the banking system, along with regulatory bodies like the Federal Reserve and the U.S. Treasury, must ensure financial stability. Therefore, this incident should alert CEOs across the industry to the need for coordinated efforts to strengthen the banking system's integrity, even if Bagehot's dictum, as a practical matter, may apply no longer to any but the smallest of U.S. banks.