WHAT KILLED SIGNATURE BANK AND SILICON VALLEY BANK?

Capital isn't king, it's court jester. Confidence is king.

“The cause of the present depression in the prices for railroad stocks and stock securities generally is not merely a Wall Street matter. It is deeper and beyond the influence of the Stock Exchange, and it is not in the power of all the banks and brokers of the city to put a stop to the panic which has seized upon the public mind. The railroads are just at this moment the object of opposition and distrust, but the banks are not free from grave suspicion. They may not escape in the general withdrawal of public confidence, and their existence is not worth twenty-four hours in the event of general alarm among depositors. Public confidence is the very breath of financial life, and it is folly to talk about the strength and solvency of our banking institutions with distrust filling the public mind.”

Detroit Free Press, August 29, 1857

Throughout 1986, Columbia Savings paid for multiple full-page advertisements in The Los Angeles Times.

“In these days of uncertainty,” one begins, “Columbia Savings offers you something certain to hold onto.”

The half dozen paragraphs that follow then attempt to dispel any doubt about this.

Thanks to solid and efficient management, the ad notes, Columbia ranked first among savings and loans in Forbes Magazine’s Yardsticks of Management Performance.

Columbia also holds over three times as much capital, the ad continues, as the government requires.

“With that much capital,” it’s easy to conclude, “Columbia really does offer something certain to hold onto.”

After all, capital is king!

Or . . . is it?

Four years later, Columbia was seized by regulators after a run on its deposits sent it careening toward insolvency.

Wait!

How could this be?

Didn’t Columbia offer something certain to hold onto?

Didn’t the Beverly Hills-based thrift have enough equity on its balance sheet to capitalize three institutions?

Isn’t capital king?

The answer is that, no, capital isn’t king.

Nor is it prince.

Nor princess.

Nor queen.

Capital’s true identity is court jester — the person tasked with redirecting the attention of the crowd.

This is as true today as it was in the late 1980s.

Washington Mutual boasted the highest tier one common capital ratio among big banks in the quarter before it failed in 2008.

On March 10, 2023, Silicon Valley Bank was seized by regulators despite having the third-highest common capital ratio among the nation’s biggest banks.

And forty-eight hours later, Signature Bank was shut down even though its capital ratios comfortably exceeded the most stringent regulatory standards.

In each case, it was a want of confidence, not capital, that served as the poisoned arrows.

Capital isn’t king; it’s court jester.

Confidence is king.

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