‘Financial Regulation Has a Really Deep Problem’
On January 18, a prominent financial newsletter noted that if Silicon Valley Bank were liquidated that day, “it would be functionally underwater.” Months before the nation’s 16th-largest bank collapsed, incomplete information provided to regulators indicated that the bank was stable, whereas public signals—such as SVB’s overreliance on longer-term securities hammered by rising interest rates—told a very different story. So why didn’t anyone do something?
To help answer this question, I turned to Natasha Sarin, a lawyer and an economist teaching at Yale Law School, who served in senior roles at the Treasury Department under Secretary Janet Yellen.
[Derek Thompson: The end of Silicon Valley Bank—and a Silicon Valley myth]
Sarin thinks that many of us are asking the wrong questions. Instead of focusing mostly on what to do after banks suffer this type of financial distress, federal regulators need to get better at forecasting errors before they become crises. And to do so, they’re going to have to update how they determine whether banks are in good standing.
In our conversation, Sarin described a regulatory system that failed to detect the market’s growing trepidation with SVB and similar banks. In part, regulators were hobbled by that exempted banks
