As the nation and world reflects on what the failure of Silicon Valley Bank (SVB) means for start-ups, businesses, and banking, we were wondering what exactly this tells us about our broken finance system. So, we asked two people – with diverse experiences in the finance system – to share their reaction to the failure of SVB and what this means for the food and agriculture finance space.
First, we hear from best-selling author and widely recognized speaker on global food systems Robyn O’Brien. In 2020 she was recognized on Forbes Impact 50 List for her work at the intersection of agriculture and climate and she is widely known for sharing the message “You can’t fix a broken food system with a broken finance system.”
Then, we’ll hear from Charley Cummings, founder of Walden Mutual. Charley spent 8 years as founder and CEO of Walden Local – a sustainable meat company, which now serves thousands of families across the Northeast, before starting Walden Mutual to help people grow their savings while supporting local farms and food businesses daring to do things differently.
Here’s what Robyn shared:
RFSI: The failure of SVB is yet another indication of our broken finance system – what steps, if any, come to mind for reforming these bank failures?
Robyn O’Brien (RO): There are three things to look at: the homogenous system they operate within, attempts over the last several years to loosen banking regulations and what is known as the ‘revolving door,” and the Fed.
1) A homogenous system: If nature’s taught us anything, it’s that homogeneous systems fail. Our farmers see it every day. According to the Financial Times and Fortune, white men run 98% of finance. I’m a broken record on this, but there are not enough women leading financial firms and Fortune 500 companies in the U.S. Only 37 of the Fortune 500 companies had women CEOs as of last year.
2) Lobbyists and the revolving door: Years of lobbying by SVB and others to weaken banking regulations enacted by the Dodd-Frank Act following the 2008 financial crisis preceded this collapse. Every federal lobbyist that registered to work on behalf of Silicon Valley Bank swung through what is called the “revolving door” between the federal government and private sector, according to OpenSecrets. All of Silicon Valley Bank’s registered lobbyists in 2022 previously held jobs in the government responsible for overseeing and regulating financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced key stress tests for banks, and other provisions that big banks lobbied for years to undermine. A decade after the financial crisis of 2008 and excessive lobbying by the banking industry, Congress rolled these regulations back.
3) The Fed: In 2008, the Fed created an invention called quantitative easing. With quantitative easing, the Fed was able to more than quadruple the money supply in just a few years. The goal of that was to encourage banks and other investors to extend more risky debt. The controversy around quantitative easing is focused on how the reduction by the Fed in long-term interest rates is accomplished by “flooding” the economy with money to stimulate more economic activity. Once it printed all that money, there was no way to withdraw it from circulation. The Fed tried several times, only to see the market start to crash, at which point the Fed turned the money back on, according to Christopher Leonard, the author of The Lords of Easy Money.
All three of these things impact farmers, food, and ag companies every day. With the excessive amount of money now in circulation due to the Fed’s quantitative easing, share prices have skyrocketed, putting enormous pressure on executives to try to justify and prove their share price, debt levels have skyrocketed, creating an enormous financial burden for everyone from students to farmers to food companies.
Most consumers are not aware that during COVID, the Fed printed 300 years’ worth of money in just two months.
RFSI: Any thoughts on what agriculture and food system companies can do to better protect themselves from risk in their banking/financing decisions?
Capital is the first ingredient in any food or ag company, and yet we fail to engage alongside the financial sector on policy that impacts our money supply. Financial policy is impacting our business models, share prices, and debt levels every day. And it is absolutely impacting our farmers. Policy departments should be part of our industry’s business models, just like marketing, operations, and financial departments. As someone who has always put the farmers and our industry first, I cannot emphasize enough how important it is that we participate in these conversations with the Fed so that our voices are heard, and not just the voices from a dangerously homogenous financial industry. We tend to think as an industry that the Farm Bill is the only way to impact the financial health of our industry. We could not be more wrong.
Here’s what Charley shared:
RFSI: The failure of SVB is yet another indication of our broken finance system – what steps, if any, come to mind for reforming these bank failures?
Charley Cummings (CC): I am concerned that the reaction to all of this for many business depositors (those with more than $250k on deposit) is the conclusion that your money is only safe in big banks because they now have an implicit (if not explicit) government backing. But the most important lenders to small farms and businesses are small banks. So, I think it would serve us well to see something change on FDIC limits or policy that corrects this distortionary effect of this type of bailout. It’s also worth noting that mutual banks (those that are owned by depositors rather than investors) have historically failed at half the rate of stock-owned banks. So in formulating new policy responses to this crisis, it’s worth asking, where are the failures and excessive risk-taking NOT occurring in the banking system today, and how do we support the type of banking doesn’t promote this type of thing?
RFSI: What does the failure say about the need for alternative financing and banking options for our companies working in food and agriculture, in particular?
CC: I don’t think we want the banking system to collapse into four global banks. Food and Ag lending is specialized – and requires people immersed in the business. This is true of other verticals as well – where your lender can walk in the trenches with you, and truly understand the metrics that drive your business, and offer general support and counsel as much as a loan, they can be a true business partner. But it’s important to acknowledge too that at various stages of development food and farm businesses need all kinds of capital with different risk / return profiles – initial investors in a startup are different from an equipment finance provider after 5 years of history. A bank cannot provide all of these, so we really need a holistic financial ecosystem that can provide finance across the entire lifecycle.
RFSI: How, if at all, does Walden Mutual offer businesses alternatives (in terms of risk management or something else) that SVB and others don’t?
CC: We are fortunate to be in an unusually strong capital position as a new bank, so there are no near-term liquidity risks for us. The challenge for any bank is a mismatch of loans vs. deposits. I have been told banks are much like two hands clapping – you cannot clap with only one hand. So when you do have a mismatch, this can lead to risk-taking. This usually takes the form of “duration risk.” SVB, for example, was flooded with tech deposits without enough demand for loans over the past few years. So these deposits have to go somewhere, and they invested in long-term treasuries to at least get some yield (vs. short term treasuries with essentially zero). Then when deposits dropped, there was no way to repay deposits without selling those treasuries, or finding some other source of capital. When they couldn’t… well we all know what happened next. There are a lot of folks in community banks that are really upset by this, because to most bankers this seems like very basic risk management…. and SVB was way out of line relative to peers on their investments.
Frankly, small banks don’t typically engage in this kind of thing, because they have very simple balance sheets. You can match specific loans with specific deposits to control duration risk. In big complex banks, “balancing” your deposits, loans and investments requires many, many sophisticated analysts. No one person can possibly understand it. So risk management becomes opaque and theoretical, instead of a single person’s responsibility.
In our case, we also manage risk by really understanding the businesses and farms we’re investing alongside. Our underwriting can feel more like equity diligence than the typical box-checking of a generalist bank. We think that results in differentiated underwriting, and therefore better risk management but again, also more value delivered to our borrowers.
RFSI: What else have you been thinking about in light of this situation that you might want to share with our readers?
CC: My hope is that this crisis is a wake-up call in a positive sense: where you bank matters. It is one of the most impactful purchasing decisions you can make as a person and as a business. As Kat Taylor and Bill McKibben described persuasively in the LA Times recently – when you bank with the top-five banks, $125,000 in a savings account is equivalent to an entire year’s worth of the average American’s carbon impact (driving, flying, eating, buying, etc. – everything). And even more fundamentally, banks can reward shareholders… or they can support and nourish an ecosystem. As our board chair says, do you know where your money spends the night?
Sarah Day Levesque is Managing Director at RFSI & Editor of RFSI News. She can be reached here.