SVB is Donald Trump’s Bailout

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Image Source: Tony Webster – CC BY 2.0

There are two key points that people should recognize about the decision to guarantee all deposits at Silicon Valley Bank (SVB):

1) It’s a bailout,

2) Donald Trump is the man responsible.

The first point is straightforward. We gave a government guarantee with a large amount to people who didn’t pay for it.

We’re going to get as many silly games in this issue as we did in 2008-09. Gamers will tell us that this guarantee doesn’t cost the government a cent, which is probably true. But that doesn’t mean we haven’t done the big depositors something of great value.

If the government offers to guarantee a loan, it is more likely that the beneficiary will get the loan, and that they will pay a lower interest rate for this loan. In this case, people holding large uninsured deposits with SVB apparently decided that it was better, for whatever reason, to expose themselves to risk by keeping these deposits with SVB, than to settle their finances in a way that would keep their money more protected.

This means parking their deposits at a larger bank, which is subject to more careful scrutiny by regulators, or adjusting their assets so that they are not exposed to one bank. They can also take ten minutes to review SVB’s financial situation, which is usually a matter of public record.

For whatever reason, large depositor banks chose to expose themselves to serious risk. When their bet went bad, they actually wanted the government to provide the insurance they hadn’t paid for.

This brings us to the second point, this is Donald Trumps bailout. The reason it’s a bailout is that the government provides a benefit that depositors don’t pay for. It is also, in fact, a subsidy to other medium-sized banks, because it tells their depositors that they can count on the government to cover their deposits, even if they are not insured and the bank is not subject to in the same analysis as the largest bank.

This is where the blame lies with Donald Trump. His decision to stop reviewing banks with assets between $50 billion and $250 billion led to problems with the SVB.

Before the passage of this bill, a bank the size of SVB would have been subject to regular stress tests. A stress test means projecting how a bank would fare under various adverse scenarios, such as rising interest rates that seemed to sink the SVB.

If regulators had subjected SVB to a stress test, they would almost certainly have identified its problems. They will then need to raise additional capital and/or pour in deposits.

But Trump has dragged regulators into the job. This is wrongly described as deregulation. This is not.

Deregulation would mean both the elimination of SVB review and the end of insurance for the bank. (In principle, this means ending all deposit insurance, not just the insurance for large accounts discussed here.)

What happened in 2018 effectively allowed SVB to still benefit from the insurance without having to pay for it. This is comparable to telling drivers that they do not need to buy auto insurance, but will still be covered if they are in an accident. Or, perhaps a better example would be to say a restaurant is covered by fire insurance, but it doesn’t have to comply with safety standards.

It is disingenuous to describe this as deregulation. This is the government giving subsidy to the banks in question. It is understandable that the banks prefer to describe their subsidy as deregulation, but this is not accurate.

Either way, this bailout is Donald Trump’s bailout. He mentioned the 2018 bill when he signed it. We are now seeing the results of his actions.

This first appeared on Dean Baker’s Beat the Press blog.

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