麻豆影院

We鈥檝e seen this movie before, so how could history be repeating itself so soon? A pair of thought leaders shares what went wrong.鈥�

The last time Shaun Davies saw a movie about bank failures, he was living it as a research analyst on a fixed-income trading desk at Smith Breeden.听

鈥淲atching what鈥檚 happening at Silicon Valley Bank right now is bringing back all those warm fuzzy feelings of 2007 and 2008,鈥� said Davies, an associate professor of finance and research director of the Burridge Center for Finance at the Leeds School of Business. 鈥淚t鈥檚 eerily reminiscent.鈥澨�

Silicon Valley Bank鈥檚 failure last week, and the subsequent failure of Signature Bank, reminded Davies of his industry career, when questions were being raised about the health of Bear Stearns and its hedge funds.听

鈥淲e had a lot of political figures saying the problem was contained. We had a lot of CEOs coming on the news saying everything would be OK,鈥� he said. 鈥淏eing removed from the financial crisis for nearly 15 years, we can look back and understand 听how everything unfolded. But in that moment, no one knew what would happen, or how bad it might get. That鈥檚 a little how I feel now.鈥�

Sanjai Bhagat, a professor of finance at Leeds, wasn鈥檛 working at trading desk when the subprime crisis unfolded, but he did write the book on the factors that contributed to it. was featured in Harvard Business Review, among others, and the subject of discussion in the U.S. Department of Treasury and the FDIC as experts and regulators worked to head off the next crisis.听

Two of Bhagat鈥檚 key recommendations were ignored by Silicon Valley Bank鈥攖ighter controls on executive compensation and requiring lenders to finance more of their banks with equity capital. 听

In the 2008 crisis, he said, 鈥淐EOs sold hundreds of millions of dollars of stock just prior to the crisis. We recommended restricting compensation, so that executives cannot sell stock or exercise options for six or 12 months after they leave the office.

鈥淏ut we saw exactly the same behavior here, with senior executives selling significant amounts of their holdings leading up to last Thursday鈥檚 announcement. The SVB board needs to explain why there were no restrictions on the sale of those stocks.鈥澨�

He also argued that 20 percent of banks鈥� total assets should be financed with equity capital. At 2022 year end, 5.8 percent of SVB鈥檚 assets were financed by equity capital.听

鈥楢 parade of non sequiturs鈥�

鈥淏anks鈥� arguments against having more equity capital amounts to a parade of non sequiturs鈥攁rguments that are just economic nonsense,鈥� he said. 听听

A major difference from the 2008 subprime mortgage crisis is that this time around, the Federal Reserve is actively fighting inflation. Davies pointed out that Fed Chairman Jerome Powell said last year that the agency would aggressively raise interest rates to curb inflation, a process that would be painful.听

鈥淵esterday鈥檚 actions鈥濃�攇uaranteeing deposits at the banks鈥斺�渨ere probably the right ones, but the U.S. government undermined the Fed鈥檚 credibility in the inflation fight. Because at the first sign of real pain, they flinched.鈥澨�

Furthermore, Davies said, if this becomes a long-term approach by the Fed, it will encourage excessive risk from banks, since they鈥檒l have a federal safety net for their depositors, creating potential havoc in the markets going forward.听

He鈥檚 also concerned about investor psychology, especially for those with accounts at regional banks, whose stock prices have taken a beating since SVB鈥檚 news came out.

鈥淧anic can cause good banks to fail,鈥� he said. 鈥淲e don鈥檛 have much recent experience with bank runs in this country, but people are getting concerned. If you have deposits above the $250,000 FDIC threshold, you might say, 鈥榃ell, the government will insure that, but it might be safer to pull my money out.鈥� That鈥檚 a real threat to those regional banks, especially the ones with a high concentration of their deposits with just a few people and companies.鈥�

Venture investment

Another unknown in this particular crisis is the impact on venture investment. In a world of rising interest rates, it was always going to be that much tougher for startups to raise capital. Now, with an institutional advocate like SVB sidelined, 鈥測ou may see innovation stifled as it becomes harder to get capital to entrepreneurs,鈥� Davies said.听

鈥淪ilicon Valley Bank had a very unique skillset. Maybe they can maintain that knowledge if they鈥檙e sold, but you may see that knowledge lost and dispersed among competitors,鈥� he said. 鈥淭here will be players who move into this space, but you鈥檙e not going to replicate the kind of expertise this bank had overnight.鈥澨�

But, as Bhagat pointed out, the run on SVB might be part of a larger question about how high-tech, high-growth ventures should be financed.

鈥淔inancing your high-tech, high-growth company with debt is the original sin,鈥� he said. 鈥淚 understand why founders and VCs would do it鈥攊t means they don鈥檛 have to dilute their own equity ownership in the startup. But that comes with additional risks.听

鈥淰Cs and entrepreneurs cannot be allowed to say they want the upside of greater equity without having to face the downside of debt financing, because now, the U.S. taxpayer is stuck holding the bill.鈥澨�

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Why Leeds听 Faculty and research听 Burridge Center