Five Questions With: Michael Ice

Michael Ice is an associate teaching professor at the University of Rhode Island’s College of Business Administration with more than 30 years of experience on Wall Street. 

What are the factors that caused the initial failure of Silicon Valley Bank and Signature Bank and the ripple effects? 

SVB is a somewhat unique bank in that its client base is extremely concentrated in the startup tech space in Silicon Valley. The customers have seen a large influx of cash over recent years and deposited that cash in SVB. The bank then invested these funds in long-term Treasury bonds and mortgage bonds. It was thought to be secure and near to no risk. Meanwhile, two events/patterns came to be. Venture capital funds dramatically slowed in raising funds and therefore stopped putting cash in these companies. Therefore, SVB customers [startups] had a demand for cash because they tend to be not profitable [early on]. Meanwhile, the Federal Reserve has embarked on a program of raising rates to combat inflation. Although thought to risk less from a credit perspective, 10-year [Treasury yield] carries significant duration risk and mark-to-market price risk as rates rise. As SVB customers looked to access their cash, SVB had to liquidate positions at significant losses. Once the word spreads (very quickly these days), customers rush to withdraw their deposits while they’re still available and therefore you have a run on the bank. 

Weren’t there safeguards put into place after the bank failures in 2008 to prevent these types of problems in the future? What happened to those safeguards? 

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In my view, what you have is poor risk management. I believe I read that [Silicon Valley Bank] didn’t even have a risk manager in place. It is really a failure in duration risk and liquidity risk management. Post-2008, banks are much better capitalized and therefore less levered by a significant degree. Although their investments are secure and credible when held to maturity, there is significant price exposure, which was apparently ignored. In addition, they were oblivious to the current business environment their client base was experiencing.  

Are there or will there be any local effects? So far, it seems it’s the bigger banks that are feeling the aftershocks. Is there a reason for smaller publicly traded banks locally or even the local community banks to have to worry? How about local depositors? 

I am somewhat less concerned to ripple effects as Silicon Valley Bank and Signature Bank are somewhat unique with their very concentrated customer base, and in this case, an apparent complete failure in risk management from a duration and liquidity standpoint. 

Most of the focus, historically, has been on the quality of loans and secure assets against the loans and their ratios. Obviously, held to maturity these assets [Treasury bonds] are almost riskless.   

I don’t have strong concerns for the local banks, although a run could theoretically happen to any bank that doesn’t employ prudent risk management, particularly with liquidity. The general public can be emotional, and maybe not properly informed, and the big banks know that.   

Again, most of the focus has been on loan quality, leverage and capital adequacy. Not as much on the depositors. And you would expect competent duration and liquidity management. I think this will bring new light to the issues as we now see they can create a run on a bank just as swiftly as a poor loan book or poor quality of investments. 

There was a big debate over whether the decision to ensure all depositors at Silicon Valley Bank and the Signature Bank get all their money back (beyond FDIC coverage) should be considered a bailout or not. What’s your opinion? 

I’m OK with what the regulators are doing to backstop deposits. Versus Lehman Brothers Inc. in 2008, investors are collateralized by U.S. Treasuries. That was not the case with Lehman [when it collapsed]. So there’s not a question in a bankruptcy whether [SVB depositors] would get their money, but when.  

What’s the bright side to these banking troubles? Are there any positive outcomes? 

If you consider lessons learned a bright side, then yes. The lesson: know your client and the environment in which they conduct their business, and the risk inherent in your depositors. Risk management of a bank is more than credit risk and capital adequacy. We now see duration risk and liquidity risk and will establish better ways to monitor or regulate them.