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Silicon Valley Bank missed its risks. What risks are in your bank?

By Anne Perrault

Last week, ignored risks tanked Silicon Valley Bank in California. The bank didn’t plan for how rising interest rates by the Federal Reserve could ultimately leave it short of funds for its customers—primarily venture capitalists and startups who were feeling pinched by the tech downturn driven by those same rates.

As a mid-sized bank serving a particular market in a particular place, SVB faced concentrated risks. When its customers in Silicon Valley faced similar challenges at the same time, SVB had not planned ahead to offset its own risks tied to those challenges. This failure of planning left it without the financial capacity or cushion to respond to unexpected market turbulence. 

The Federal Reserve engineered the background for this collapse with its rapid increase in interest rates aimed at quelling inflation. But more directly, the Federal Reserve’s negligence with respect to its bank regulatory responsibilities was behind the failure. The Fed is supposed to make sure banks it supervises—which include SVB—are “safe and sound.” Clearly SVB wasn’t. 

It’s fair to wonder what risks banking regulators are missing for your wallet.

As it turns out, SVB’s risks might pale in comparison to other risks smaller banks are facing. If your money is in a regional or community bank in a climate vulnerable area, you might want to ask financial regulators to step it up. 

Just last week, US Treasury Secretary Janet Yellen warned that climate change is already having a major economic and financial impact on the United States. “These impacts are not hypothetical. They are already playing out. In the United States, there’s been at least a five-fold increase in the annual number of billion-dollar disasters over the past five years compared to the 1980s.” 

Translation: Communities in many locations are being hammered, with huge implications for smaller financial institutions there. 

Dozens of smaller insurers, for example, have already fled Louisiana, Florida, California and other climate hotspots. Residents are paying much more on average for state-run insurance, but it doesn’t provide the same coverage. The Louisiana Insurance Commissioner is calling it a crisis, while taxpayers are footing much of the bill. 

As floods, hurricanes, wildfires, drought and more continue to destroy houses, farms, and businesses, smaller banks holding these property loans should be worried. So should their regulators.

Some of these banks, like SVB, are ignoring building risks in the pursuit of short-term profits. But many others haven’t created or willingly assumed the most serious risks they face, and are limited in what they can do to respond. They are serving areas and for assets that are particularly vulnerable to climate change, and often to communities, like farm communities, with less resilience to these impacts.

The Fed and other banking regulators are responding to these risks too slowly and are focused only on risks to the largest financial institutions. This tunnel vision has led them to ignore the financial stability implications of how these institutions are facilitating climate risks through their financing of the fossil fuel industry. They’re missing how smaller financial institutions—and the public—are footing the bill

Regulators need to change their focus, and make sure that all banks threatened by climate change can be safe and sound.

Spooked companies and depositors are looking for safe places to move their money. After the SVB collapse, they will be considering all risks—including climate risk. Smaller banks aren’t at the top of their list, for many reasons beyond those banks’ control. These banks should do something they have often opposed and try to get regulators to help level the playing field. They can request that regulators consider new ways to allocate financial responsibility for these risks, and to otherwise reduce climate risks that they cannot divest or diversify away. It’s the best way to ensure their customers that what’s in their wallet is safe.