The Tough Reality of Legacy Banking in Light of Silicon Valley Bank’s Collapse

Summary: The recent collapse of a bank in Silicon Valley has brought attention to the challenges faced by legacy banks. The article discusses how the Federal Reserve’s lending against eligible assets, including government bonds, is not a new concept, and Japan has even conducted unsecured and unconditional special lending during past financial crises. Government bonds, inherently risk-free in terms of currency risk if held until maturity, become problematic when there is a need for liquidity due to significant deposit withdrawals, making it challenging to liquidate assets before maturity, potentially resulting in selling at a loss.

The article highlights that this risk applies to all bonds, loans, or other securities with maturity dates. Moreover, real estate, unless securitized and actively traded in the market, always carries this risk. On the other hand, securitized real estate is subject to daily price fluctuations and greater awareness of potential risks.

While selective lending by the Federal Reserve may seem unfair, some argue that depositors should simply move their funds to larger banks. The banking industry inherently favors larger players, and legacy business models struggle to compete, especially in Japan, where regional banks, integrated into mega-banks, often operate at a loss, and effective solutions remain elusive.

Amidst competitive lending, interest rates for credit naturally settle at appropriate levels. However, for diversified lending across various accounts, the chances of consistently finding good borrowers are very low. Additionally, information disparities overwhelmingly favor large banks, especially those operating globally. The executive leadership of global banks is considered to possess a more natural foresight in anticipating global events such as pandemics, wartime scenarios, sanctions, trade regulations, and interest rate manipulations.

While local banks may have advantages in regions where valuable resources like gold or oil are discovered, global banks often sweep in with favorable rates, eroding the competitive advantage of small local banks. Indirect finance is inherently exposed to such fierce competition.

In Japan, many regional banks have merged into mega-banks, with most operating at a loss. Effective remedies are scarce, and there has been no special treatment for small banks, nor have interest rates risen yet. The problem persists but has not escalated significantly.

The Silicon Valley bank’s collapse, triggered by large deposit withdrawals, underscores that banking is inherently risky. It is vital to align assets and liabilities correctly on the balance sheet, but if significant depositors trigger systemic risk without concern for the banking system, there is no way to mitigate the risk effectively. In comparison, real estate, despite its risks such as vacancies, damages from earthquakes, or wars, remains relatively safe. Real estate, particularly when securitized, may experience temporary price fluctuations, but it generally settles within the expected consensus range. Compared to the risks inherent in banking, real estate appears to offer a safer and more valuable investment option, provided that asset values appreciate in the currency in which the securities are denominated.

However, it’s important to note that in the event of ownership rights becoming obsolete due to, for example, war, real estate can become precarious. In such cases, safeguarding real estate may fall under the responsibility of national defense. Adam Smith, in the latter chapters of “The Wealth of Nations,” even suggested that safeguarding property rights in land historically fell under the role of kings, followed by civil governments, and in the future, it might be achieved through unalterable blockchain registries in the age of the Internet and AI.

Author: Hayato Kameta, Certified International Investment Analyst, Member of the Japan Securities Analysts Association


< Original in Japanese >










国際公認投資アナリスト、日本証券アナリスト協会検定会員 亀田 勇人