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Link from my blog SVB failure: the limitations of moral hazard, and the difficulty of assessing risk
The moral hazard and regulatory arguments are generally inadequate at explaining or preventing future banking crisis, like the collapse of SVB. There are so many ways banks can fail, or triggers that can cause a cascade of failure, that regulation is always chasing a moving target. SVB was actually capitalized well within the guidelines of Dodd Frank but it still failed.
Moreover, assessing risk is also really hard, even for professionals/experts, and even when all the information is known. SVB was done-in by needing to raise additional capital from a $1.8 billion bond market loss (out of a $22 billion investment). That is it. We're not talking hundreds of billions of dollars like 2008. In the grand scheme of things, this is peanuts. Yet it spiraled out of control, and the bank was insolvent 2 days later.
If you read the original press release from SVB on March 8th, nothing about it screams "this is fucked". It's like "We need to raise some money because we lost some money on bonds." If I read it and had to make a judgment call, not knowing what transpired, I would have said it was not that big of a deal (bad news, yes, but not catastrophic).
Overall, it is easier or more practical to just have to suffer with occasional bailouts, than aspiring to some unobtainable ideal of a financial system that is immune from ever failing. Bailouts are bad, but so are second order effects from economic contagion.
Some of Curtis Yarvin's essays from the Great Financial Crisis are quite enlightening. I think maturity transformation is just fundamentally bullshit, and one of the primary functions of a modern government is to preserve the illusion that this bullshit is money. I suppose you could say the same thing about why green sheets of paper are considered money, but it still means that who wins and who loses in banking is essentially determined by this.
that reminds me, I am looking forward to his take on SVB
It would almost be redundant. The only difference is that instead of the proximal cause being the government jamming the price signal for credit risk, the proximal cause of SVB was the government jamming the price signal for short-term interest rates post covid.
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