I’ve discovered two new pieces of information. First, SVB was a member bank of the Federal Reserve. Second, apparently almost no one came back to the actual offices even after that became the norm in most businesses.
Let’s start with the second issue. According to the Financial Times, SVB employees (including most of the top officers) never came back to the office.
Yeah, that will work. As a friend once told me, “I need to see their eyes so I can tell when they’re lying.” Personally, I rely on the smell of fear. Reading eyes is difficult on a Zoom call. Detecting odors is (currently) impossible.
Federal Reserve Membership
Now to Fed membership. It turns out the lists of member and non-member banks are maintained by the regional banks. (The lists for 12th District banks are pdf files at the end of this piece.) SVB was a member bank. In fact, CEO Greg Becker was a member of the San Francisco Fed board of directors (until he resigned just before the collapse). That means a couple of things. First, SVB had access to the Discount Window (the Fed’s lending facility). They could have applied for a loan from the San Francisco Fed. In fact, they may have done just that. We won’t find out for a long time, possibly never.
When a bank applies for a loan from the Fed, the process is remarkably similar to an individual applying for a car loan. The Fed evaluates their creditworthiness. It’s a loan to be repaid. If SVB applied and the application was rejected, the S.F. Fed’s apparent inaction becomes more obvious. The application would have brought SVB to their attention. Rejecting the application would have sent a strong message to the executives. They would start to frantically seek other sources. Meanwhile, it’s likely that the S.F. Fed would have told the Board of Governors. They, in turn, would notify FDIC. It’s entirely possible that California DFPI was told by FDIC about SVB’s problems. If so, the notice undoubtedly included a recommendation that DFPI intervene. Fast. Really fast.
If SVB executives realized how much trouble they were in, they probably would not have applied at all. But it is frankly unbelievable that the Fed and/or FDIC didn’t know what was going on. They looked at the situation and realized that the bank needed to be put out of its misery before causing any more damage. The best solution was exactly what happened. Close the bank, call in FDIC and let the professionals sort everything out.
One final note on bank charters. The Constitution gives states the power to charter businesses. Banks are businesses. Therefore states can charter banks.
But there are also national banks. (The N.A. in Wells Fargo Bank N.A. stands for National Association.) These are chartered by the Office of the Comptroller of the Currency. This power was created by President Lincoln on February 25, 1863. The OCC website has a brief history of the agency.
Any bank can be chartered by OCC or a state. But, regardless of the charter, banks can be members of the Federal Reserve system. This creates a matrix of possibilities:
The notations in each square are those used by FDIC.
N: National bank (OCC charter, Fed member)
SM: State charter, Fed member
NM: State charter, not a Fed member
* : All national banks must be Fed members.
That’s it for this chapter of How the Banking System Turns. Stay tuned for future episodes.