By Dr Huw Macartney
Department of Political Science and International Studies, University of Birmingham
Edited version of an article originally published on iai
We’re asking the wrong kind of questions surrounding the collapse of Silicon Valley Bank. Five main issues have emerged thus far: business models; stability; moral hazard; regulation; and tightening. But without considering the broader picture, we remain stuck in a Groundhog Day loop, where crisis follows crisis with disconcerting regularity and similarities.
If we took a step back and acknowledged the underlying pattern over recent decades, why is this latest bank failure such a surprise?
The pattern is actually rather simple: an economic or financial crisis occurs; what follows immediately is a government rescue package (to varying degrees and with different targets in mind); then follows a loosening of monetary policy (rates are lowered and – more recently – bond-buying programmes (QE) are launched), all in a bid to stave off recession and promote economic recovery. Next, in the medium term, regulators tighten their regulatory grip, reems of new legislation are passed, new institutions are created, and there is a “looking in the rear-view mirror” period of trying to make sure that we never experience such a crisis again. Gradually though, the economy starts to improve, partly induced by new lending stimulated by lower rates and increased liquidity, regulations are watered down or repealed, the finance industry presents a “we’re alright Jack” façade, and all seems well. Until… the next crisis hits.
So, with a theory of financial, regulatory and monetary policy cycles in mind, what are the right kinds of questions to be asking? Two spring to mind: one specific and one more general.
Specifically, in this instance, why were regulatory authorities not more prepared and alert to the fact, given the buoyancy of stock markets in recent years and the lending boom of the 2010s, that rising Federal Reserve rates would almost inevitably trigger the collapse of big financial institutions?
And more generally, why are we stuck with this crisis inducing regulatory and supervisory cycle?
What should we do differently? One obvious answer is to internalise the structural, cyclical factors into regulatory decision making. More optimistically, even greater regulatory resources should be afforded the authorities as the financial cycle is on the up.
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The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.