Silicon Valley Bank, which collapsed after depositors rushed to get their deposits on 10 March 2023, has been placed into the receivership of the Federal Deposit Insurance Corporation, which created the Deposit Insurance National Bank of Santa Clara, said a press release published by the FDIC on 10 March. A joint statement from US treasury secretary Janet Yellen, Federal Reserve board chair Jerome Powell and FDIC chairman Martin Gruenberg published on 12 March said, “Depositors will have access to all of their money starting Monday, March 13.”
To find out more about banking regulations and how they differ between Europe and the US, Delano talked to Claude Wampach, director in charge of banking supervision at Luxembourg’s financial regulator, the CSSF.
With Silicon Valley Bank, “you have a bank that does pretty much ordinary type of intermediation business by collecting deposits,” began Wampach. Their business model was, however, concentrated in technology firms, and this concentration was a prominent feature of the situation.
On the asset side, SVB had bought US treasuries--“what we as supervisors would consider pretty conservative investments, as regards the credit risk,” said Wampach. But “with the rise of interest rates, this bond portfolio lost value, which is just about a mechanical relationship between the value of a bond and rates of interest.”
SVB sustained losses, and then there was a “nervousness in the market,” leading to depositors “massively reacting to this and withdrawing liquidity from the bank,” explained Wampach. Given the massive withdrawals, the bank failed to mobilise the required cash in the very short run.
“In a nutshell, it was kind of a classical bank run in the sense that depositors wanted massively to have their deposits back, and it got triggered by some nervousness on the bank’s capacity to further sustain losses,” he said.
Regulation differences between the US and Europe
Are there differences in regulation between the US and Europe?
“We have kind of a common ground when it comes to large international banking organisations,” explained Wampach, referring to the Basel committee rules targeting the large international banks. These apply to large international banks in the US, the EU and elsewhere around the world, but not to smaller, domestic banks. “Each jurisdiction is free to enact legislation at its own level for these institutions, i.e., non-large international banks. There is no need to harmonise these rules because they don’t interact at the international level. So each jurisdiction basically decides on what regime the smaller banks operate on.”
In Europe, it was decided that the Basel rules should be transposed onto smaller institutions as well. The US took a different stance, explained Wampach. After the 2008 financial crisis, the US did have a more conservative stance, “but then under the Trump administration, the rules were weakened as regards smaller institutions,” he said.
Changes in US regulations
In 2018, the US congress passed a bill that increased the asset threshold for which “certain enhanced prudential standards shall apply” from $50bn to $250bn. In addition, the asset threshold at which company-run stress tests were required was increased from $10bn to $250bn. Smaller institutions, including Silicon Valley Bank, were therefore subject to lower levels of regulation. SVB had around $200bn in assets at the end of 2022.
The Federal Reserve, in 2019, finalised rules for banks to “more closely match their risk profiles,” as stated in a press release from October 2019. According to the Fed, “The rules reduce compliance requirements for firms with less risk.” Based on the amount of its assets, the Federal Reserve had classified Silicon Valley Bank in a category titled “Other firms,” which meant that it was not subject to stress testing. A stress test is an analysis or simulation meant to determine how a financial institution would cope with an economic shock.
Liquidity coverage ratio
With the Basel rules, for example, the liquidity coverage ratio dictates how much liquid assets an institution should have in order to face redemption demands from depositors, explained Wampach. “So a bank like SVB in Europe would need to hold 40% of its depositor base in terms of high liquid assets,” he said. “In the US, it was not subject to that regime. That’s a difference.”
And on the asset side?
For banks in Europe, both small and large, “we have provisions that require them to test how their earnings, but also how their capital, would fare under interest rate shocks. So, for example, if the interest rate goes up by 200 basis points, what would that mean for a bank’s bond portfolio? If that test shows a material impact in terms of capital, the supervisor would ask the bank to hold additional capital,” he explained.
“These two regulations are, of course, important, because they mitigate, to a significant extent, what happened to SVB,” said Wampach. “You have on the one side, the requirement on liquidity--meaning that if you hold deposits, you have also to hold liquid assets in case the depositors would ask to take their deposits back.”
“And on the asset side, you have provisions that ask you to hold capital to exactly face the situation where you would face losses from the bond portfolio if the interest rates would rise,” which is what happened in the SVB case, noted Wampach.
So could such a situation happen in Europe? In Luxembourg?
“The financial system and the banking system bear risks. These risks are mitigated up to a certain level,” said Wampach. “In Europe, we have in place regulations that mitigate fairly well those issues.”
“For instance, I can tell you that if I look into the Luxembourg banks today, if, as of today, the interest rates would still rise by 200 basis points, none of the Luxembourg banks would basically face issues with its capital, i.e., solvency. None,” stated Wampach. “Based on the information that we get from reporting on the scenarios I mentioned, none of them faces an issue if the interest rates would further significantly rise. That gives us a lot of comfort about where we stand today, and even what is to come, if interest rates would rise further.”
Could there be any impact in Luxembourg?
“Our banks and the banking system have no exposure [to] SVB. And even on the investment fund side, it’s also no significant exposure that we see, based on what I have as data right now,” Wampach concluded.