Illustration: Annelise Capossela/Axios
Good bankers know the industry they serve. They know its idiosyncrasies, its cast of characters, its business cycles. They help their clients through good and bad years – and are rewarded with deep loyalty and large deposit accounts.
Why is this important: The industry that bankers know differs from bank to bank, but it is never the bank. A wine relationship banker at Silicon Valley Bank must know a lot more about malolactic fermentation than Tier 1 capital adequacy ratios.
- Even at CEO level, someone like SVB’s Greg Becker found himself on the advice of the San Francisco Fed not because he was a banking expert, but because he had extraordinary visibility on the Californian technology industry.
- In hindsight, this was a glaring conflict, given that the San Francisco Fed was SVB’s primary regulator. Nonetheless, bankers really do have an unparalleled level of understanding of what’s going on with too-small-to-go-public companies, including Silicon Valley startups.
The big picture: Capital markets and investment banks are very good at providing banking services to large public companies – but only about 15% of American jobs are in large public companies.
- Commercial banks therefore provide a crucial and irreplaceable service and, as is natural in all industries, they tend to specialize.
- The Silicon Valley Bank financed Silicon Valley, as its name suggests, as well as the California wine industry. Bank Signature cashed Broadway. Silvergate cashed in crypto.
- Relationships like this take time to establish and maintain, which is one of the reasons the federal government is keen to sell SVB and Signature as going-concern companies – and one reason it doesn’t. not try to save Silvergate, which operated in an industry that the authorities to want cut off from the regulated financial system.
Between the lines: In countries dominated by three or four massive universal banks, there is less idiosyncratic industry risk when a single mid-sized bank fails. But the United States has made a political decision not to want its biggest banks to get any bigger than they already are – which means a lot more small banks with a wide range of specialties.
Where is it : Risk management is a cost center for banks, not a profit center. The way to move up the ranks in a commercial bank is to earn money for your employer – and the way to do that is to know your customers and their needs well.
- When commercial banks fail, foreigners are often shocked at how badly they have managed things like interest rate risk or deposit concentration risk. But those jobs are only done at the top of the org chart – and people who move up there tend to do so not because of their understanding of how banking works, but because of their understanding of other industries. entirely.
The bottom line: There is an obvious financial stability reason for regulators to want to minimize bank failures. But there is also a basic economic reason. Regional banks like SVB and Signature are deeply rooted in local industry, and without them many industries would be in dire straits.