It is interesting that both banks had bright, but relatively short lives (Heartland Tri-State Bank opened its doors in 1985, and PacWest was founded in 1999.) However, that is quite typical for the U.S. banking system. Bankruptcy statistics in the financial sector show that the life span of the average U.S. bank is half that of a human. Since 1983, only 15% of failed banks were over 100 years old, while the average operating time of the other 85% banks was only 38 years.
That's exactly the age that the First Republic Bank would have been in July,
Losses to private customers from bank failures over the past 40 years have exceeded $1.4 trillion, double the state budget of Louisiana in that time. It turns out that the modern financial market for most banks is a minefield with short life cycles, which are the cause of risky business strategies.
President Joe Biden
The number of banks in the U.S. has been on a steady downward trend. In the early 1980s, the number of American banks reached 14,000; by 2013 their number had decreased by 65%. Over the past 10 years, the number of banks has decreased by another 22%, and on Feb. 14, 2023, the number of banks in the U.S. was 4,718. Analysis shows that the majority of bank failures are associated with strategic mistakes of management.
The financial problems of the early 1990s, the global crisis of 2008, and the geopolitical shocks of 2022 create in the financial market a "life under a volcano" effect, when you know in advance that a new financial storm will hit the market every 15 years. When you live under Vesuvius, you don't plan for a very long time, and might feel encouraged to take more risks. Under such conditions, a competent state policy becomes a guarantee of the citizens' safety and should take into account the following factors:
First is the policy of the Federal Reserve. The events of March 2023 demonstrate that the Fed was unwilling or unable to apply early response measures to new challenges. Signs of risk for SVB and Silvergate appeared well before 2023, and the structures of their balance sheets shows that long-term stock growth was not possible due to obvious business-model risks. It is necessary to modernize the national risk assessment system at the Fed, with a focus on preventive-control elements and early diagnosis of potential risks.
Close attention must also be paid to corporate governance. Bank management knew bankruptcy was imminent, but instead of saving the compan, they used insider information to save their own funds. For example, SVB CEO Gregory Becker
Independent audits need to be strengthened. The critical risks of the modern external audit are illustrated by the fact that KPMG gave SVB a clean bill of health just 14 days before the lender collapsed. But the audit opinion was silent on what actually brought down the bank — its unrealized bond losses and ability to hold them. The methodology of risk assessment by audit companies requires serious modernization.
To summarize, we can conclude that the current requirements of legislation and the Fed are a necessary but not sufficient condition for the development of a modern bank. Banks need to be braver and more proactive in identifying and managing risk, so as not to be afraid to stay ahead of the law, based on a deep understanding of their own business model. Under such conditions, qualified compliance becomes an independent competitive advantage, because it allows the bank to develop faster than the market without imbalance risks and the danger of violating the law. A risk-based approach helps prevent critical imbalances and ensure proactive risk control by focusing compliance resources on risk areas and removing excessive administrative burden from low-risk clients.
