Michael S. Barr, Vice-chair of the Board of Governors of the Federal Reserve System, warned the U.S. earlier this week that banks should take a careful and cautious approach to engaging in crypto-asset related activities. Banks need to determine whether their crypto-related activities are “legally permissible” before engaging in them.
Mr Barr, who is responsible for the Board’s bank supervision efforts, shared his comments one day before Silicon Valley Bank (SVB) was placed into receivership by the Federal Deposit Insurance Corporation. The bank, which provides funding to crypto start-ups, saw a drop in the value of the assets it accepts as collateral for its lending activities. Several Wall Street analysts have opined that the expectation of continued fed fund rate increases has contributed to the fall in value of assets held by Silicon Valley Bank.
In a throw back to the “too big to fail” days of the Great Financial Crisis of 2008, prominent hedge fund manager, Bill Ackman of Pershing Capital, has suggested that due to an inability of private lenders to save Silicon Valley Bank, the government should step in to save the bank. Saving Silicon Valley Bank is necessary, according to Mr Ackman, if the venture capital industry is to avoid taking a hit to its ability to raise capital and finance deals.
I disagree with Mr Ackman’s assessment of SVB’s threat to the venture capital industry. SVB’s venture capital revenue as reported on the bank’s 31 December 2022 Consolidated Reports of Condition and Income for A Bank With Domestic and Foreign Offices was approximately four million dollars, year-to-date. If the public policy is to bail out a bank to save the venture capital industry, a state member bank in the Federal Reserve System is not a bank that is too big to fail.
And while SVB participates in the federal funds market, it is not a primary dealer or market maker. In addition, it has not demonstrated success in converting access to the fed funds market into profit. Interest income from federal funds sold and securities purchased under agreements to resell totaled approximately four million dollars. The expenses of federal funds purchased and securities sold under agreements to repurchase, however, totaled $59 million.
Even without getting to Vice-chairman Barr’s observation of legal permissibility (which I promise to get to over the weekend), one should ask if this small state-chartered bank that happens to be a member of the Federal Reserve System is worth the hub bub and whether it would be honest public policy to politicize SVB’s financial problems.
11 March 2023
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