By Yevgeny Shrago
As the autopsies come in for the rapid collapse of Silicon Valley Bank (SVB), there is ample blame to go around. One of the main culprits is the same regulator that engineered the extraordinary intervention to calm markets in the wake of the collapse: the Federal Reserve.
As it reviews the many ways its actions failed to prevent or even fueled this crisis, the central bank should look out for other sources of risk for banks of all sizes with a business model concentrated on a single geography or industry.
As climate change worsens and the energy transition intended to address it accelerates, many of the features of Silicon Valley Bank’s collapse will be increasingly present for banks reliant on high-emitting clients or invested in climate-impacted assets. The Fed should take its SVB review as an opportunity to chart a course around these landmines, instead of letting the economy step on them before it acts. The parallels with climate risk require its attention.
As the tech industry’s favorite bank, SVB grew quickly as startups and venture capital firms parked large cash deposits on its books, in amounts that far exceeded the legal $250,000 limit for insured deposits. Similarly rapid growth has been experienced by a few other banks from an influx of risky oil and gas business.
Faced with a torrent of deposits and little customer demand for corporate loans, SVB tried keeping its profits up by investing in long-term government bonds. Unfortunately, rapidly rising interest rates drove down the prices of these bonds. Accounting rules allowed SVB to avoid recognizing these losses as long as it did not sell those bonds. Similarly, banks invested in climate-impacted areas may be able to avoid recognizing the effect of unpriced climate risk on their portfolios.