Until bankers have more to lose themselves, collapses like SVB and Credit Suisse will keep happening

theguardian.com:

E xecutives at Silicon Valley Bank (SVB) and Credit Suisse took substantial risks. SVB proactively expanded the bank’s deposits, some might say excessively. These depositors were uninsured and undiversified. And back when interest rates were low, the bank invested significantly in US government bonds, which was fine at the time. But when there were signs that interest rates were rising and creating substantial interest rate risk, managers left this portfolio unhedged and unchanged. How come SVB managers took those risks? It seemed that they lacked “skin in the game”.

The risks taken by executives at Credit Suisse were of a different nature, but still substantial. By becoming involved in such companies as the now defunct Greensill and Archegos, the bank’s capital took a hit. The fines it has accrued after facing scandal after scandal have also bitten into its capital. It can be said that those involved also lacked skin in the game.

In the aftermath of the 2008 financial crisis, there have been efforts on both sides of the Atlantic to ensure that future bailouts of depositors would involve as little taxpayer money as possible, and would penalise bank owners. The Dodd-Frank Act in the US, for example, seemed to promise that, should a bailout of depositors be needed, shareholders would take the hit. If a bank needed to be closed and restructured, shareholders would bear losses and some creditors’ bonds would be converted into stock, which could lead to substantial future losses. Regulations in the UK and the eurozone went in similar directions.

These were extremely welcome efforts. Differentiating depositors (who can know almost nothing about a bank’s operations) and bank owners (who should in theory know and monitor things a