The right is wrong: ESG investing did not create the banking crisis
Once again U.S. market mistakes, regulators and supervisors at the Federal Reserve and poor management decisions have caused a banking crisis. It started with the collapse of the Silicon Valley Bank and Signature Bank, two regionally significant, poorly risk-managed, overly concentrated firms that failed to adjust their risks and depositors ran for the exits in a bank run.
Today the shocks are reverberating across the globe. Credit Suisse has folded and been rescued by the Swiss National Bank, and subsumed by UBS in an arranged shotgun marriage. More banking collapses may be expected as this latest crisis plays itself out. There is plenty of blame to go around.
Unfortunately, right-wing American populists, not content to blame those who truly deserve it, are pinning the crisis on allegations of so-called “woke” ESG — environment, social and governance investing, by the failed U.S. banks. We have seen a similar playbook used with critical race theory and America’s argument over education and historical truth. This latest attempt needs to be debunked head-on before ESG investing, which is on the rise, becomes wrongly tainted by a bogus narrative unmoored from facts and reality.
What do I mean?
Republican provocateurs, from Florida Gov. Ron DeSantis to Sen. Josh Hawley (R-Mo.) to Rep. Marjorie Taylor Greene (R-Ga.) all jumped on the SVB was too woke bandwagon. These cultural warriors claim that SVB and Signature were undone because of their supposed focus on ESG investments and diversity, equity and inclusion policies.
Is there any evidence this narrative is true?
Not at all.
SVB and Signature failed because they had poor risk management. SVB didn’t even have a chief risk officer for months prior to the collapse.
SVB invested heavily in tech startups and Signature invested in crypto. Both banks made reaches for yield via investments in firms that other banks would not back.
Both banks should have anticipated Federal Reserve interest rate increases over the last year — they were well understood by other banks — and adjusted their bond holdings’ maturity ladders accordingly. That failure — a basic risk management requirement — was at the root of their collapse.
SVB and Signature drank the Silicon Valley Kool-Aid: They acted more like the firms they lent to, less like prudent conservative bankers and more like the venture capitalists and tech firms they worked with. The banks’ cultures and conduct norms were distorted and deficient.
The regulators and supervisors reportedly warned SVB to make changes — but the bank failed to do so in time. Could regulators have done more? Should they be chastised? Certainly.
This is a banking collapse driven by poor management decisions, poor risk management, bank boards asleep at the wheel and too little regulation of regional banks. Neither bank was subject to stress testing and strict capital requirements after a 2018 weakening of the Dodd-Frank rules for these so-called small banks, which Sen. Elizabeth Warren (D-Mass.) and the late former Fed Chair Paul Volcker fought against.
This bank crisis is grounded upon basic failures of regulation, supervision, management and corporate culture.
We saw similar faults in 2007-2008, as regional banks with excess concentration and poor risk management failed when house prices declined.
We saw it in the Savings and Loans crisis.
Bank crises also tend to occur when bankers retire, and firms lose their memory of past mistakes and lessons. After all, most young bankers today do not remember the past collapses, they were children then, not risk takers or risk managers. Hence the cycle of boom then bust repeats itself even as we would wish it did not.
Using this bank crisis to blacken the necessary green transition and far-sighted investment decisions related to sustainability and climate change should be rebutted and rejected. Ex-post debates on the failures must be based on facts not myths. As the late Sen. Daniel Moynihan (D-N.Y.) stated, “You are entitled to your own opinion. But you are not entitled to your own facts.”
Former president Trump and his political acolytes want to tar this crisis with a culture war narrative divorced from facts. Learning the necessary lessons (yet again) requires that voters, investors and Congress confront the failures of deregulation and self-regarding corporate CEOs. We should not be tilting at windmills or solar panels.
Stuart P.M. Mackintosh is the executive director of the Group of Thirty.
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