Abstract
In this paper, we develop a theoretical framework called ‘financialised valuation dynamics’, situated within debates on the power of finance, drawing on the conceptual and empirical contributions of early financialisation studies on firm competition in stock markets and the conjunctural nature of valuations. We analyse the 2023 U.S. banking crisis using our theoretical framework to demonstrate that the regulators’ ex-post explanation of the crisis as interest rate risk mismanagement and the concentration of uninsured deposits at the three failed banks ignores fundamental sources of financial instability that central banks have contributed to through monetary policy. We argue, through empirical analysis, that financialised valuation dynamics exercise taxonomic power and narrativise the business models of the three failed banks, which had led them to outperform other U.S. banks in stock market valuation before their failure. Financialised valuation dynamics depicted the three failed banks as ‘niche’ banks serving disruptive technology firms, which were conjuncturally regarded as the future growth engines of capitalism following the COVID-19 pandemic.
Keywords
Introduction
Although the 2023 U.S. banking crisis has received limited attention from critical scholarship – such as financialisation studies, social studies of finance, economic geography, and international political economy – that has produced extensive research since the 2007 financial crisis, it was taken very seriously by U.S. political leaders, regulators, and the CEOs of the largest banks due to its potentially catastrophic risk to the U.S. economy and financial system, comparable to the 2007 Global Financial Crisis (GFC) (Biden, 2023; Ozili, 2024; Wack et al., 2023). A systemic risk concern was publicly expressed by the White House and the Federal Reserve when the NASDAQ US Bank Index plummeted 24.4% over 10 days – from 3 March 2023 to 13 March 2023 – causing a loss of nearly a quarter of the banks’ valuation (Statista, 2023). The authorities in the U.S. immediately invoked the systemic risk exception previously used during the GFC and guaranteed the uninsured deposits of Silicon Valley Bank (SVB) and Signature Bank to prevent deposit runs. Two days after SVB was shut down on 12 March, the entire set of U.S. regulators – the Federal Reserve, the Federal Deposit Insurance Corporation, the Federal Home Loans, and the Treasury – coordinated to announce full liquidity support by lifting the cap on deposit insurance and introducing a new liquidity facility, the Bank Term Funding Programme (BTFP), for all U.S. banks, offering loans against government securities at par value, which was above the then market value.
BTFP was in addition to the Federal Reserve’s discount window, which U.S. banks heavily utilised during the turmoil (BIS, 2023; Fed, 2023a; GAO, 2024). A day later, on 13 March, the President of the U.S., Joe Biden, addressed the nation to reassure both American citizens and markets in the U.S. and globally. In late March and early April, roughly 3 and 5 weeks after the collapse of SVB, the CEOs of leading U.S. banks – Citigroup’s Jane Fraser and JP Morgan Chase’s Jamie Dimon – continued to raise concerns about the systemic risks arising from the failure of medium-sized regional banks like SVB and Signature Bank (Wack et al., 2023). The failure and subsequent disappearance from history of a globally significant Swiss bank, Credit Suisse, as a direct consequence of the 2023 U.S. banking crisis, also necessitated urgency in the overall crisis response.
The banks that failed in the U.S., although their business models were unusual as we will discuss below, were simple in terms of financial intermediation activity, with no links to shadow banking, speculative investment banking, or large-scale asset management – areas that most critical political economy and financialisation scholarship, interested in the power of finance after the 2007 GFC, have focused on. The regulation, too, primarily concentrated on maintaining financial stability for global systemically important financial institutions (G-SIFIs).
Most mainstream literature on the 2023 crisis, as expected, has discussed, following the regulators’ framing of the crisis, interest rate risk mismanagement and the appropriateness of regulatory capital adequacy and liquidity rules for small and medium-sized banks (see, e.g. Hamurcu, 2023; Jiang et al., 2023; Neef et al., 2023; Van Vo and Le, 2023). However, not all professional financial analysts agreed with the official explanation that the particular interest rate risk at SVB could be hedged. Scott (2023) from Schroders argued that the interest rate risk at SVB could not be hedged by interest rate swaps, a derivative that banks routinely use for interest rate risk management purposes, because the underlying hold-to-maturity fixed-rate assets were agency-issued mortgage-backed securities (MBS) that have much higher volatility in duration than the Treasuries used in interest rate swaps. The interest rate risk at the failed banks, especially SVB, as a major cause of the 2023 U.S. banking crisis, has been a common theme in most mainstream studies (see, e.g. Hayes, 2024; Jiang et al., 2023;). The business model of SVB, which triggered the 2023 U.S. banking crisis, has attracted particular attention in the literature, as it was characterised by concentrated uninsured deposits that made SVB highly vulnerable to a bank run (Metrick, 2024). Kelly and Rose (2025) identified weaknesses in business models not only at SVB but also at all three failed banks. Kelly and Rose (2025) are unusual in the literature examining the U.S. banking crisis, as they cover all three failed banks rather than just SVB, which triggered the crisis.
In the literature on the causes of SVB’s failure, Von Vo and Le (2023) and Yousaf et al. (2023) highlight the role of investors in analysing failures. However, they note investors’ euphoric interest in SVB before the crisis but do not explain its causes, nor do they include the other two failed banks in their analysis. In this paper, we argue that the 2023 U.S. banking crisis is not simply a case of technical failures in interest rate risk management, liquidity management, governance mechanisms, or regulatory oversight; instead, it is rooted in the endemic financial instability within financialised capitalism, which has specific conjunctural characteristics modulated by what we call the ‘financialised valuation dynamics’ (FVD). FVD classifies all three failed banks as a homogeneous asset class for investors. Unlike most of the existing literature that focuses solely on SVB, our analysis considers all three failed banks collectively because, as we explain below, financialised valuation dynamics classified them as ‘niche regional banks’ with disruptive roles in the U.S. banking sector. This makes our contribution to understanding the causes of the 2023 U.S. banking crisis original, as we will detail below, both theoretically and empirically. Central bank unconventional monetary policies since the GFC have exacerbated this instability, which is shaped by financialised valuation dynamics. We propose an empirically grounded conceptual framework, drawing on the conjunctural insights of Erturk et al. (2008) and Engelen et al. (2010) into financialised capitalism, which emphasise its temporal character in creating asset-bubble-related instability and in reorganising finance through new value-creation narratives following major financial crises. For example, following the GFC, we have seen the rise of disruptive digital finance narratives promising efficiency and social inclusion, which have driven high market valuations for fintech start-ups (see, e.g. Bussman, 2017; Carney, 2017; Chiu, 2016). All three failed banks – SVB, Signature Bank, and First Republic Bank – though in different ways, were linked to the conjunctural narratives circulating in capital markets and economic policy circles about the transformative potential of disruptive technology start-ups in capitalism’s future. The bank run on these three banks was unprecedented in that it involved uninsured deposits mainly held by entrepreneurs owning disruptive technology start-ups and venture capital firms investing in such start-ups, particularly between 2020 and 2023 – a period that we date from the U.S. COVID-19 lockdowns, when the Federal Reserve launched quantitative easing and other unconventional monetary policies far larger than those following the 2007 GFC, to the monetary tightening initiated in March 2022 to combat inflation.
In this paper, we introduce a distinctive theoretical tool within the context of discussions on the power of finance, which we call ‘financialised valuation dynamics’, and explain how this power operated during the 2013 U.S. banking crisis. We argue that, before the 2023 U.S. banking crisis, financialised valuation dynamics exercised taxonomic power to create an asset class of ‘niche’ banks for stock market investors that outperformed other banks, even non-bank technology companies, in the case of SVB. Financialised valuation dynamics benefited from ultra-accommodative central bank monetary policy following the COVID-19 lockdowns during the conjuncture of the 2023 U.S. banking crisis. As we will argue, the 2023 U.S. banking crisis was a unique conjunctural case of unsustainable valuations of risk assets issued by start-ups classified as disruptive technologies, which toxified the liability side of the balance sheets of three small and mid-size failed regional banks through uninsured deposits. These uninsured deposits represented realised wealth of disruptive technology entrepreneurs and companies that migrated from capital markets – where start-ups were valued to bubble standards – to banks that were similarly valued at bubble standards. Financialised valuation dynamics tend to legitimise toxic assets as drivers of innovation-led growth within capitalism until the bubble bursts, at which point toxic particles in the financial system harm the socioeconomic order. Private equity leveraged buy-outs in the late 1980s, emerging market sovereign bonds in the 1990s, the dot-com bubble in the late 1990s, collateralised debt obligations in the early 2000s, and the taper tantrum in 2013 are such globally felt financial disasters, primarily caused by financialised valuation dynamics (see Erturk et al., 2008; Engelen et al., 2010, 2011).
Since the 2007 GFC, central banks’ unconventional monetary policies aimed at zero-bound interest rates through quantitative easing (QE), especially in the US, have transformed financial markets in terms of traditional risk and return relationships and have influenced the conceptualisation of ‘infrastructural power’ (see Walter and Wansleben, 2020; Golka, 2023, for a critical review of this concept). The colossal scale and scope of central bank unconventional monetary policies following the COVID-19 lockdowns have further deepened the risk distribution transformation within financial markets. A new conjuncture has emerged in financial markets, particularly in U.S. asset markets, after the COVID-19 lockdowns in 2020. Erturk et al. (2008) characterise conjunctures in financialised capitalism by the formation of asset bubbles that eventually burst. The relevant bubble for the 2023 U.S. banking crisis was the disruptive technology start-up valuations that persisted from 2020 to 2023. Although disruptive technology and digital transformation-related start-ups have emerged and expanded post-2007 GFC, notably with the invention of blockchain, this paper focuses on their new dynamics after the COVID-19 lockdowns, which relied on central bank monetary policies related to COVID-19. The shift in U.S. monetary policy beginning in March 2022 to counter post-COVID inflationary pressures caused the bursting of the disruptive technology bubble, as valuations – based on new actual and expected interest rates, which influence discount rates in financial markets – sharply declined, prompting portfolio rebalancing favouring fixed-income bonds. As argued below, all failed small and mid-sized regional banks in the U.S. had business models based on bubble valuations in the disruptive technology sector between 2020 and 2023. As early as November 2022, before the three failed banks experienced the business-model consequences of the bursting disruptive-technology bubble, the Federal Reserve had expressed concerns about inflated valuations of risk assets. Still, it lacked tools to reorganise the markets for state purposes (Fed, 2022). Financialised valuation dynamics operate in an unpredictable and non-linear manner, creating a vortex of power for actors during and shortly after a crisis, which can significantly influence future power relations. For instance, the 2023 U.S. banking crisis had a lasting impact on the power of finance in Switzerland. Since the 2007 GFC, investment banking has lost its role in organising financial markets, especially in Europe, with Deutsche Bank and Barclays winding down their pre-crisis dominant investment banking divisions. Credit Suisse has long struggled to reinvent itself as a wealth and asset management bank. Even Goldman Sachs attempted, unsuccessfully, to develop a digital retail bank. Financialised valuation dynamics temporarily redefine viable bank business models, rendering finance’s power unstable in relation to politics, national interests, and central bank monetary policies. These dynamics offer a theoretical framework to understand the evolving power of finance over time, particularly within the shifting conjunctures of financialisation.
This paper is organised to present our theoretical stance alongside empirical evidence under three subsections in the following section. Empirical evidence and theoretical arguments are integrated under each heading. The following section discusses, in three subsections, how financialised valuation dynamics operated during the 2023 U.S. banking crisis. In these subsections, we will (a) demonstrate how its taxonomic power depicted the three failed banks as ‘niche’ banks for investors, legitimising their higher valuation in the stock market and nullifying regulatory classifications of these banks in terms of risk and size; (b) empirically examine how financialised valuation dynamics shaped the narratives around the business models of the three failed banks before the 2023 crisis, linking them to the relevant disruptive technology sector; (c) argue that financialised valuation dynamics were amplified by accommodative central bank monetary policy and the central bank’s cognitive and policy stance on disruptive digital companies. The concluding section will further develop, in theoretical terms, the paper’s conceptual framework and its contribution to debates on the power of finance and financialised capitalism.
Financialised valuation dynamics and the 2023 U.S. banking crisis
The influence of financialised valuation dynamics relies on a system called financialised capitalism, which necessitates continuous pricing of firm business models and financial performance, including banks, in capital markets for owners and controllers of capital. As previously explained, financialised capitalism has shifted firms’ competitive focus to stock markets, where success is judged by relative share price performance against competitors. The stock market performance of a firm also influences managerial remuneration, as equity-linked variable pay for managers in financialised capitalism is the modern finance-theory-legitimised mechanism to address the agency problem. Regulated banking institutions are no different in how they deploy financialised valuation knowledge and techniques to evaluate firm success and manage the agency problem when owners and managers are separated. Financial valuation dynamics discursively establish power through financial knowledge-based analysis by equity analysts and financial experts in capital markets. Golka and Van der Zwan (2022, p. 1018) discuss how such financialised valuation power influences governance in Dutch pension funds and state that: ‘As financial experts gain authority, other actors such as elected politicians or organised interests may be pushed to the side lines’.
The operation of financialised valuation dynamics (FVD) is legitimised by establishing a truth-regime, in the Foucauldian sense (Foucault 1982), regarding stock market valuation of firms. This truth regime normalises the socioeconomic consequences of capital allocation, wealth distribution, and executive pay. We do not apply Foucault’s concept of ‘truth-regime’ in a strict sense, as his use concerns complex discursive and strategic processes in the sciences and social sciences over long historical periods characterised by ruptures. Langley (2009) discusses in detail how Foucault’s ideas of knowledge-power and truth regimes have been used in international political economy literature, emphasising their accommodating indeterminacy and non-linearity, rather than making universal or absolute claims across space and time. Our application of the concept of truth-regime is similarly contingent on the historical conditions that exist over conjunctures of financialised capitalism. Our understanding of truth-regime is something that happens at a particular conjuncture, and ‘Conjuncture can be understood as a distinctive but unstable combination of circumstances within which events and episodes happen to produce more quasi-resolution than permanent crisis’ (Engelen et al., 2010: p. 49). And ‘Conjunctures of typically four to seven years are defined by a capital market configuration of asset prices and the availability of funds supported by appropriate, grand narrative and performance. It is possible to analyze the New Economy from 1996 to 2000 or the excess liquidity period from 2000 to 2007 in these conjunctural terms’ (Erturk et al., 2008, p. 28). Our conjunctural understanding of financialised valuation dynamics, therefore, theoretically distinguishes our position from other uses of the concept of financialised valuation.
Politicians and regulators do not challenge this valuation and truth regime, despite its frequent costly failures. It is legitimised in economic theory – neoclassical economics and modern finance theory – and provides practical technologies, tools for valuing firms, and contracts for managerial labour. Modern finance theory and financial economics establish financialised valuation dynamics as a truth regime in a Foucauldian sense by offering knowledge legitimacy through academia and practical applications through consultancy practices (see Froud et al., 2006). The truth regime remains institutionally stable through a network of private, profit-seeking legal entities like competing equity analysts, reliably functioning stock markets, continuous sources of trusted financial and economic data used even by academics, financial media with reflective knowledge, investigative journalism, and other complementary entities like research centres (see Leins, 2018). The specific operation of financialised valuation dynamics during the 2023 U.S. banking crisis is demonstrated below.
Financialised valuation dynamics’ taxonomic power
The regulatory taxonomy, the Federal Reserve’s financial stability framework, classified all three failed banks as small and mid-sized regional banks. Therefore, the question of what kind of capital adequacy and liquidity rules apply to banks of this size and nature has become a key political and regulatory issue following the crisis. The background to this regulatory debate was the ‘Economic Growth, Regulatory Relief, and Consumer Protection Act’ (EGRRCPA) of 2018, which reduced the regulatory capital and liquidity requirements for smaller banks and community banks (Fed, 2019: 9).
The Dodd-Frank Act of 2010 was a major regulatory response to the GFC of 2007–2008 in the U.S., designed to make the financial system safer through higher capital adequacy requirements and new liquidity rules. The Dodd-Frank Act used size-based thresholds to classify banks for regulatory purposes, except for the definition of globally systemically important banks (G-SIBs). Although size is included in the criteria for defining G-SIBs, other factors such as interconnectedness at both national and international levels are also crucial, as they carry systemic importance. However, size and interconnectedness are highly correlated, and banks with large assets and trading activities tend to be considered G-SIBs. The size-based classification under the Dodd-Frank Act employed thresholds of 10 billion USD and 50 billion USD for capital adequacy and regulatory stress tests. The Volcker Rule, which regulated proprietary trading risk in the U.S. following the GFC of 2007–2008, also used the percentage of total size to measure trading assets. The regulatory response to the GFC adopted a classification system based on size, business activities, and capital size as risk drivers (see Congressional Research Service, 2017 for detailed coverage of regulatory classification in the U.S. before the 2023 banking crisis). Of course, the unique interest rate risk created by the Federal Reserve’s quantitative easing policies after the GFC – affecting banks that use mark-to-market accounting for both their trading and non-trading assets – makes the concept of size-based risk classification by regulators largely meaningless in reality, as demonstrated by the 2023 banking crisis.
Not for the first time in recent history, central banks failed to recognise how risk is distributed across asset markets through financialised valuation dynamics (FVD). FVD’s conjunctural taxonomy for the three failed banks differed substantially in its logic and purpose and was more relevant to investors (owners of capital) and bank executives (controllers of capital). Control and ownership of bank capital in financialised capitalism, as extensively discussed in the earlier corporate financialisation literature (see Fligstein, 1993; Crotty, 2003; Froud et al., 2000; Lazonick and O'Sullivan, 2000; Krippner, 2005), operates in tune with stock market competition on a quarterly and annual basis within a specific topography (equity markets) and temporal order (quarterly investor meetings, annual executive bonus assessments, etc.). The logic of bank classification within financialised valuation dynamics tends to override the financial stability aims of regulatory classifications, which apply quasi-scientific methods to calculate and monitor capital adequacy under the Basel framework. Banks engage in two game-theoretic power struggles in a financialised capitalism: one, where the optimisation in capital markets generates higher utility for economic actors who control banking firms, namely, managers; and another, where the focus is on the optimisation of risk-absorbing capital for regulators (see Engelen et al., 2011; Erturk, 2016).
Valuation of the three failed banks as niche banks.
Source: Alexopoulos et al. (2022a).
SVB, at the heart of the U.S. banking crisis in 2023, had been classified as a ‘niche’ bank for investors as early as 1995. A specialist equity analyst from Alex. Brown and Sons described SVB as ‘niche banking at its best’: Since its inception in 1983, Silicon Valley has established itself as a leader in providing financial support to emerging growth and middle-market technology companies across the United States. Silicon Valley primarily focuses on venture capital-backed firms with revenues ranging from $0 to $250 million (Morford 1995: 3).
This market perspective on SVB remained stable until its collapse in 2023. In 2005, prior to the 2007 crisis, JP Morgan highlighted SVB’s specialised position in technology and life sciences, from early-stage to post-IPO (Pancari et al., 2005). As discussed below, the short-term conjunctural valuation dynamics of start-ups and venture capital firms between 2020 and 2023 allowed SVB and Signature Bank to achieve extraordinary valuations (see Figure 1). The Federal Reserve’s ultra-loose monetary policy and the rise of the digital economy narrative after COVID-19 lockdowns in the U.S. played an unprecedented role in the valuations of disruptive technology start-ups and the related valuations of the three failed banks serving these start-ups and their owners. This brief period of rapid growth in valuations ended with the Federal Reserve tightening monetary policy by sharply increasing interest rates from March 2022, with effects becoming evident on the valuations of technology companies in Summer 2022 and on the three failed banks in Spring 2023. Three failed banks’ comparative stock market performance (share prices of the three banks and the Dow Jones US Banks Index = 100 on 1 April 2011) (source: Capitaliq (2024)).
As Figure 1 demonstrates, these three banks outperformed the U.S. bank index, the Dow Jones US Bank Index, until their failure in Spring 2023, delivering attractive returns for investors. During such periods of aggressive FVD activity, regulatory power is almost nonexistent, as any regulatory intervention could trigger market instability, and regulators are aware of this. Furthermore, as the third pillar of Basel II, ‘market discipline’ affirms the central bank’s understanding of market efficiency in risk pricing aligned with neoclassical economics. After the GFC, their stance on ‘market discipline’ has become more agnostic due to the faulty credit ratings of tranches of collateralised debt obligations by the market. Nonetheless, central banks lack regulatory power over equity markets, start-up valuations, venture capital investments, exchange-traded fund creation by asset managers, leveraged private equity, and speculative hedge fund activities – significant parts of the financial system. Banks primarily serve their owners in the stock market by competing on share price. Risk-related constraints imposed by regulators do not extend to this market-driven competitive behaviour. As observed during the 2023 U.S. banking crisis, FVD’s ‘niche’ banking classification overrode regulators’ power regarding ‘safe banking’. As Haldane (2009), Engelen et al. (2011), and Erturk (2016) argued, banks compete on return on equity – an essential ratio impacting bank valuation under FVD – not on regulatory standards of what constitutes a safe bank.
Figure 1 illustrates that the three failed banks benefited from the valuation power of investment banking expertise in buy-side equity analysis. SVB, Signature Bank, and First Republic Bank significantly outperformed the Dow Jones US Banks Index following the COVID-19 lockdown. This stock market success validates the business models that the Federal Reserve retrospectively identified as financially unsustainable (Fed, 2023b). In financialised capitalism, valuation dynamics exercise greater influence than central bank regulatory power, where the legitimacy of shareholder value primacy – the idea that firms, including banking firms, should compete in the stock market to fulfil capitalism’s socioeconomic promises – overrides central banks’ technocratic power and financial stability mechanisms such as Basel capital adequacy rules, macroprudential regulation, stress testing, and others.
Knowledge that produces categorisation and taxonomy is a form of power, as Foucault has argued in his historical account of the rise of modernist thought as the episteme of the capitalist system (Foucault 1982). Martin (2002) and Langley (2008, 2014) have introduced Foucauldian analytical tools – such as governmentality and subjectification – to financialisation studies, arguing that power is internalised as self-discipline rather than external coercion. Foucauldian notions of power and his popularity in contemporary social sciences have attracted the attention of The Economist. This magazine, regarded as a sense-maker of free markets, explained Google’s renaming to Alphabet and Amazon’s creation of the Amazon Web Services (AWS) subsidiary as strategic moves to influence their market valuations. These taxonomic moves within the context of financialised valuation dynamics led to these internet-era companies being reclassified as digital technology assets in the stock market (The Economist June 21, 2018). Froud et al. (2006) provided an analytical framework for such corporate behaviour under financialised capitalism by examining General Electric as a case study. During Jack Welch’s era as CEO, GE managed its taxonomy by continuously reclassifying itself for investors through narratives and strategic actions in response to financialised valuation dynamics between 1980 and 2001. Leins (2018) studied the power of narratives in financialised capitalism through an ethnography of financial analysts at UBS, revealing how buy-side valuation research involves strong storytelling about future financial performance rather than being a purely scientific exercise based on valuation theories and models. Regulatory power cannot reach the knowledge technologies of equity analysts, which are part of FVD, that produce narratives utilising financial data.
As Engelen et al. (2011) demonstrate, the stock market valuation of banks involved in shadow banking – which expanded their balance sheets at an extraordinary rate through both direct and indirect securitisation processes before the 2007 GFC – had increased significantly. This increase in stock market value creates wealth for owners of capital, shareholders, and enriches controllers of capital – managers – through equity-linked pay. In financialised capitalism, the alignment of interests between owners of capital and managers – though theoretically permanent and often random in practice – is expected to occur in the stock market through share valuation (see Bansal, 2020). Equity-linked executive pay is more influential for capital than Basel measures of capital, unless bank owners and managers rely on direct social subsidies for solvency in times of distress and crisis. The Fed’s analysis of SVB’s failure (Fed, 2023b) included only one page on its financialised valuation and noted SVB’s competition in the stock market by showing comparative share price performance from 2017 to March 2022. What the Federal Reserve terms ‘external factors’ in its report on SVB’s failure is essentially what the Basel capital adequacy rules identify as ‘market discipline’ – one of the three pillars of Basel II, introduced in 2004 and viewed until the 2007 GFC as vital. The Fed’s analysis also observes that credit rating agencies have maintained SVB’s rating since 2007, without commenting on how financial valuation dynamics impact regulation.
The Federal Reserve’s report on SVB’s failure (Fed, 2023b) highlights the influence of financial valuation dynamics. It also admits that it had not examined Performance Management and Incentive Compensation (PM/IC) at SVB since 2017. The report notes that the remuneration of the CEO and CFO was based on return on equity (ROE) and total shareholder return (Fed, 2023b: 74), rather than on risk management. Furthermore, the Federal Reserve acknowledged that the CEO could sway the compensation committee at SVB to shape the incentive package, as the board, representing shareholders, was concerned that managerial staff – the CEO and CFO – might be lost to competitors if their performance was not measured and rewarded through financialised valuation logic – namely, stock market competition. The report on SVB’s failure features a section titled ‘Incentive Compensation’ that spans five pages, four pages longer than the single-page ‘external view’ on SVB’s stock market performance. From an analytical perspective, however, executive pay has less regulatory significance, as it falls under ‘Additional Topics’ rather than as a central issue. The FVD framework recognises the vital role of executive pay within the power of finance, as it constitutes the contract between owners of capital and controllers of capital. In financial firms – especially those that expand and extend financialisation – this forms a key element of financialised capitalism. Despite SVBFG’s worsening condition and its negative cash balance, cash bonuses were paid to several SVBFG executives and staff for their 2022 performance on 10 March 2023, despite SVB’s failure that day. … Stronger or more specific supervisory guidance or rules on incentive compensation for firms of SVBFG’s size, complexity, and risk profile—or more rigorous enforcement of existing guidance and rules—may have mitigated these risks (Fed, 2023b: 75).
For stock market analysts, SVB and the two other failed banks were classified as technology-related asset classes. The bank that triggered the 2023 U.S. banking crisis and raised global systemic concerns, SVB, was compared to Nasdaq technology companies, not to other financial intermediaries. Figure 2 illustrates how SVB, as an early ‘niche’ bank specialising in technology start-ups and venture capital activities since mid-1995, exhibited a stock market performance closely correlated with the NASDAQ Index – a stock index comprising many U.S. technology companies and often regarded as a benchmark for the technology sector’s performance. There was also a brief period shortly after the COVID-19 lockdown when SVB’s size doubled, and its stock market performance outperformed the NASDAQ Index. SVB’s stock market performance against NASDAQ Index (SVB share price and NASDAQ Index = 100 on 24 February 2006 (source: Capitaliq (2024)).
Retrospective identification of risk management and business model failures by the Federal Reserve essentially serves as an alibi for its limited capacity to counter financialised valuation dynamics. A regulator would never intervene in the nexus of control and ownership of capital, legitimised under the shareholder value primacy ideology and priced in the stock market, as Figures 1 and 2 demonstrate. Uninsured deposits were cited as a major contributor to the failure of the three banks. However, the financialised valuation dynamics narrativised such deposits as evidence that all three banks were rationally preferred by disruptive technology sectors and had a ‘niche’ strength, even when, by 2022, they were already experiencing deposit outflows from technology clients (Alexopoulos et al., 2022d). In the next section, we will empirically examine how FVD’s analysis of the business models of the ‘niche’ banks differed from the ex-post analysis conducted by the regulators.
Financialised valuation dynamics, disruptive technologies, and business models of ‘niche’ failed banks
The regulatory investigation into the causes of failure at the three banks identified rapid growth, funded by concentrated uninsured deposits, as a common critical business model risk (FDIC, 2023a; FDIC, 2023b; Fed, 2023b). Investigations into each bank revealed other causes specific to their individual circumstances. These were related to each bank’s specific business models and sources of income. Both SVB and First Republic Bank relied on interest income from fixed-rate assets, but these assets differed in type. SVB held government bonds and agency-issued mortgage-backed securities, while First Republic mainly held fixed-rate mortgages, notably jumbo mortgages for wealthy clients. An increase in interest rates affected the mark-to-market value of these assets, causing both banks to face deposit withdrawals – particularly by uninsured depositors – triggered by different events for each. For SVB, a failed attempt to raise capital as a response to regulatory capital depletion, caused by mark-to-market losses, sparked a bank run. First Republic Bank was the third bank to fail, influenced by contagion from the earlier failures of SVB and Signature Bank, both of which relied on uninsured deposits for funding. The third failed bank, Signature Bank, did not hold interest rate-sensitive assets but experienced a deposit run by uninsured depositors due to contagion from the failures of SVB and Silvergate.
What the regulators, ex-post, identified as weaknesses in business models – such as rapid growth through over-reliance on uninsured deposits – did not, however, appear as weaknesses in the regulators’ ex ante examination of the three failed banks. In fact, the regulators’ CAMEL (Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk) examination ratings of all three failed banks were satisfactory (FDIC, 2023a; FDIC, 2023b; Fed, 2023b). The CAMEL ratings given to the three banks before their failure did not conflict with the FVD assessment of their business models – ‘niche’ models outperforming the U.S. bank index in the stock market. Central banks’ regulatory power is effectively suspended when FVD rules the stock markets until a bubble bursts. The shareholder value primacy doctrine, the established governance rules that govern ownership and control of capital in financialised capitalism, legitimises FVD’s operations, including banking. FVD undermines the effectiveness of regulatory discipline and authority in assessing the financial stability implications of conjuncturally contingent bank business models.
The tipping point in the U.K. during the 2007 GFC was the deposit run on a small regional bank, Northern Rock (Cunliffe, 2017). Investment banking expertise, as reflected in Northern Rock’s strong stock market performance before its failure, was demonstrated through its exemplary adoption of financial innovation in securitisation and inspired its peers to follow (see Erturk, 2016). More recently, the U.K. Chancellor Jeremy Hunt demonstrated the enduring influence that FVD has on politicians even after the devastating experience of the 2007 GFC. He publicly criticised U.K. banks for failing to achieve stock market valuations comparable to those of their U.S. counterparts (Morris et al., 2024).
Alexopoulos et al. (2022c), from JP Morgan, advised investors to buy SVB shares in August 2022, when SVB was experiencing liquidity problems and significantly increased its use of Federal Home Loans advances. These JP Morgan analysts, after having conducted a detailed risk analysis of SVB’s lending, liquidity, and venture capital funding of start-ups, concluded that the declining market valuation of SVB represented: ‘… as one of the best buying opportunities in over a decade and would use the current (very cheap) valuation to accumulate shares in one of the most differentiated and highly valued global brands servicing the innovation economy’. FVD’s taxonomic power in classifying SVB as a ‘niche’ (‘most differentiated’) bank, and its narrative power in associating SVB with the ‘innovation economy’, a conjunctural narrative about solving stagnant U.S. capitalism’s growth problem, were evident. The assessment of SVB’s business model by investment banking expertise was further reinforced in October 2022. When it comes to banking tech companies, which is indeed the economic growth engine in the US today, while many banks want a piece of the pie, in our view SVB Financial is more than on its way toward being a winner in business banking for tech companies (Alexopoulos et al., 2022d).
The central bank regulator’s views on the promises of disruptive technology companies were consistent with JP Morgan’s views on the technology sector and the firms serving it. In the fourth year of the series of conferences organised by the Federal Reserve Banks of Atlanta, Dallas, and Richmond, on ‘Technology Enabled Disruption’, Governor Philip N.. Jefferson stated that: The pandemic, and the tech-enabled responses to it, changed the economy in fundamental ways that will likely not revert. It is vital to understand those changes and the effects they will have going forward (Jefferson, 2022: 3).
The ‘niche’ that Signature Bank occupied during this conjunctural period was to serve cryptocurrency and related digital asset start-ups as disruptive technologies. After the failure, FDIC identified Signature Bank’s involvement with crypto and digital asset firms as a risky business (FDIC, 2023a: 2).
FDIC’s ex-post opinions on Signature Bank’s exposure to the crypto and digital assets industry lacked a convincing analysis, especially when compared to the FVD’s detailed narrative about Signature Bank’s ‘niche’ strength. Even after the collapse of some major cryptocurrencies like TerraUSD and LUNA, and insolvency issues faced by Celsius, Nexo, and Three Arrows Capital, financial analysts at JP Morgan supported Signature Bank’s business model through a thorough analysis of its customer base and highlighted that Signature Bank gained 160 new clients, including four ‘top crypto exchanges’, in the first quarter of 2022 (Alexopoulos et al., 2022b).
Signature Bank’s business model shifted from being a commercial real estate lender to serving crypto and digital asset start-ups. This change received a positive response from the financialised valuation dynamics, which highlighted Signature Bank’s ‘unique strategy of hiring experienced teams from competitors and then getting out of their way. With the company being one of only a handful of banks operating with a truly entrepreneurial culture’ (Alexopoulos et al., 2019: 1).
First Republic Bank was classified together with SVB and Signature Bank by regulators, not only because it was one of the three regional banks that failed but also because First Republic shared more similarities with SVB and Signature Bank in terms of the share of uninsured deposits, the use of Federal Home Loan advances, and balance sheet growth compared to its other peer banks (FDIC, 2023b; GAO, 2024). SVB’s total assets nearly tripled from USD 69.942 billion to USD 209.026 billion, while Signature Bank and First Republic Bank’s assets almost doubled from USD 50.591 billion to USD 110.363 billion and from USD 116.264 billion to USD 212.639 billion, respectively (Capitaliq, 2024). The total assets of the U.S. banking industry during this period increased by only about 29% (The Federal Reserve, 2023a, p. 19). Nonetheless, First Republic Bank’s business model was considered conservative by both regulators and financial analysts (Alexopoulos et al., 2011; Alexopoulos et al., 2022a; FDIC, 2023b). First Republic Bank was an established conservative mortgage lender specialising in high-net-worth individuals. Nonetheless, the conjuncture between the COVID-19 lockdowns in 2020 and the monetary tightening up to 2023 significantly affected First Republic’s balance sheet. The disruptive technology bubble in equity markets involving venture capital firms, start-ups, and private equity firms had created toxic uninsured deposits and fixed-rate jumbo mortgages on First Republic Bank’s balance sheet, as the regulatory investigation into the bank’s failure too belatedly acknowledged (FDIC, 2023b: 20).
First Republic Bank’s clients included disruptive technology entrepreneurs such as Instacart founder Apoorva Mehta, venture capitalist Chamath Palihapitiya, and real estate developer Stephen M. Ross (Delevingne, 2023). As shown in Figure 3, First Republic Bank experienced a rapid increase in deposits from 2020 to 2022, outpacing the growth of its loans. Growth of deposits at the three failed banks (source: Capitaliq (2024)).
Financialised valuation dynamics from 2020, when the COVID-19 lockdowns began, to 2023, when the effects of the Federal Reserve’s monetary tightening were fully felt in the markets after a series of consecutive interest rate rises starting in March 2022, allowed all three failed ‘niche’ regional banks to grow rapidly through deposit inflows from start-up valuations and investments in disruptive technologies (see Figure 3). Figure 3 shows how SVB and Signature Bank expanded through deposit inflows from start-up valuations and venture capital activities, as they could not generate loans to match their deposits. First Republic also had more deposits than loans, but the difference was small because it was an established mortgage bank. However, the remarkable growth of First Republic, like SVB and Signature Bank between 2019 and 2022, was driven by clients in and related to the technology sector, as the quotation above from FDIC (2023b) confirms.
The growth at all three banks is directly linked to the valuations of tech start-ups during and after the COVID-19 pandemic in the U.S. The business models of the three failed banks involved a unique conjunctural phenomenon in which the equity market bubble in disruptive technology assets had migrated to their balance sheets. This migration was primarily to the liability side of the three failed banks, in the form of uninsured deposits, which toxified their balance sheets and were intertwined with financialised valuation dynamics that were often narrativised and categorised as ‘niche’ business models.
Financialised valuation dynamics under central bank unconventional monetary policy
We argued earlier that financialised valuation dynamics played a dominant role in the 2023 U.S. banking crisis, particularly through the power vertices of taxonomy and business model analysis. FDV’s power shapes conjunctural cycles and the behaviour of the controllers and owners of capital in financialised capitalism, where ownership of firms is dispersed among both active institutional investors and passive asset managers (see Fichtner et al., 2022; Fichtner and Heemskerk, 2020). In this section, we examine how central banks’ monetary policies, discourses, and approaches to disruptive technology have strengthened the power of FVD. Since the Federal Reserve’s account attributes interest rate risk mismanagement by the three failed banks as the main cause of the 2023 U.S. banking crisis, we must critically assess whether the Federal Reserve’s role was simply that of a neutral technocrat acting within its mandates of price and financial stability.
We will argue that the Federal Reserve’s monetary policy remained accommodative until March 2022, when it shifted towards tightening, both in interest rates and asset valuations. Naturally, these are interconnected, with the latter integrated by central banks into their transmission mechanisms to stimulate economic growth. However, our focus will be on the relationship between financialised valuation dynamics and central bank unconventional monetary policies, and the implications this has for financial stability and the power of finance.
Quantitative easing reduces risk-free assets in financial markets through government bond purchases by central banks. Central banks then expect a portfolio rebalancing in financial markets, where investors buy riskier assets to replace government bonds. However, in a financialised economy, the valuation of risky assets – primarily shares in the stock market – is influenced by dynamics that benefit owners of financial assets rather than acting, as central banks assume, as signals that channel capital to the real economy through the wealth effect and lower cost of capital. Consequently, a stock market bubble occurs through a series of financialised behaviours, including share buybacks, high-premium mergers and acquisitions, and high dividend payments, rather than investments in the real economy that would create jobs and growth (see Bowman et al., 2012; Erturk, 2014; 2020; Dobbs et al., 2013). Bank for International Settlement (BIS) and the International Monetary Fund (IMF) economists have also identified the central banks’ accommodative monetary policy between 2008 and 2014 as the key cause of overvaluation of asset prices – technocratic language for a bubble in financial markets. BIS economists titled their analysis of the bubble in asset prices in BIS Quarterly Review in June 2013 as ‘Markets under the spell of monetary easing’ (Borio et al., 2013). In its April 2015 Global Financial Stability Report, the IMF warned central banks against losing control over the consequences of desired portfolio rebalancing and wealth effects under quantitative easing, noting excessive risk-taking in financial markets that leads to stretched asset valuations (IMF, 2015: 8).
The extraordinary quantitative easing following the COVID-19 lockdowns in 2020 is relevant to the 2023 banking crisis because a quantitative easing-fuelled capital market bubble of overvalued start-ups ultimately ended up as uninsured deposits on the three failed banks’ balance sheets within just 3 years. The wealth from overvalued start-ups has become uninsured deposits in these banks. In its November 2022 financial stability report, about 3 months before the Spring 2023 U.S. banking crisis, the Federal Reserve expressed concerns about the impact of financialised valuation dynamics, referring to it as ‘elevated valuation pressures’ (Fed, 2022: v).
A group of Federal Reserve Banks in the U.S. has been organising conferences since 2018 on the impact of disruptive technologies to understand their possible effect on the economy (Dallas, 2018).
However, the programmes by central banking regulators and economists on disruptive technologies do not analytically or for policy purposes address potential ‘disruptive’ asset valuations in capital markets related to start-ups, especially after the COVID-19-related quantitative easing that aimed at massive portfolio reallocation, favouring risky assets. The financial stability implications of valuations in disruptive technologies did not register on the Federal Reserve’s analytical radar at its October 2022 annual conference, although stretched asset valuations in capital markets were noted by the same epistemic community in its November 2022 report on financial stability. Central banks worldwide have been accommodating disruptive technologies without raising analytical and policy concerns about the effects we refer to in this paper as financialised valuation dynamics. The Bank of England’s ‘Future of Finance’ project is based on the premise that digitalisation of the economy and the rise of disruptive business models in the technology sector require the Bank of England to: Evaluate(s) the appropriate level of access to central bank infrastructure, including its balance sheet, for non-banks in order to support greater innovation while safeguarding monetary and financial stability (BoE, 2019).
The exuberance in valuations of ‘new’ technologies in capital markets and their potential impact on bank business models, as seen in the 2013 U.S. banking crisis, is not formally recognised in central banking policy programmes in the U.K. or the U.S. The macro-prudential system in central banking theoretically and empirically considers the implications of Minskian credit exuberance on bank balance sheets within financial cycle analysis, but there is no equivalent regulatory mindset or operational preparedness for the bank balance sheet effects of capital market valuations of innovation in product markets, like those observed in the 2023 U.S. banking crisis. The swift reversal of quantitative easing (QE) and the rise in interest rates coincided with the capital market exuberance fostered by central banks’ accommodative monetary policies after the COVID-19 lockdowns and their supportive stance towards disruptive technologies.
Therefore, aggressive monetary tightening by the Federal Reserve from March 2022 had an immediate impact on equity valuations and disruptive technology valuations in the U.S., causing bitcoin to lose more than 50% of its value and wiping out some major crypto companies like the stable coin Terra (IMF, 2022: 4). Between April 2022 and the end of 2022, U.S. equities lost over 10% of their value. However, technology valuations declined further, falling by approximately 30% (Borio et al., 2022: 9). The Economist described the turmoil in equity markets as ‘tech bubbles are bursting all over the place’ (Economist, 2022). Consequently, venture capital-backed start-up activities have fallen sharply from a peak of around USD 90 billion in the fourth quarter of 2021 to about USD 30 billion in the fourth quarter of 2022 (see Figure 4). Venture Capital Funding in the U.S. between 2020 Q3 and 2023 Q2 (source: Grabow (2023)).
SVB clearly had interest rate risk exposure, but it was more fundamentally exposed to technology start-up valuations and capital flows within the sector. Signature Bank, however, had no interest rate risk but was critically exposed to the cryptocurrency and digital assets sector. First Republic faced interest rate risk similar to that of SVB, not through securities but through fixed-rate mortgages. Its uninsured deposits were linked to start-up owners financed by venture capital. The ‘niche’ business models relied upon by all three banks for extraordinary growth proved more vulnerable than other U.S. banks to the Federal Reserve’s aggressive rate hikes in 2022. Excessive risk-taking in financial markets and stretched asset valuations, particularly in digital technology firms on which SVB, Signature Bank, and First Republic depended for growth, became their downfall. Signature Bank specialised in digital asset banking, SVB in innovation economy banking, and First Republic in mortgage and wealth management services for start-ups, venture capital, and individuals in the disruptive technology sector. FVD is not defeated because regulators attributed the failure to interest rate risk management and overreliance on uninsured deposits at the failed banks. After the GFC, too, regulators blamed shadow banking, not the FVD, which had regulated the nexus of ownership and control of capital through the valuation of financial institutions and assets – an essential signal of capitalism’s financial innovation-led growth. FVD waits for its next move in financialised capitalism following each socio-economic harm in which it played a significant role.
Conclusion
The continuous expansion of financial markets and the increasingly prominent role of central banks in financialised capitalism invite a rethinking of finance’s power within the overarching theories that define its institutional and structural power. The recent recognition of the infrastructural power of finance highlights the growing role of central banks in the economy after the GFC and their complex relationship with financial markets (see Walter and Wansleben, 2020, for a critical, historically informed discussion of infrastructural power). Golka (2023) added the ‘allure of finance” as a source of power with noumenal characteristics when empirically exploring social impact investing in the UK, revealing limitations in the understanding of finance based solely on instrumental, structural, and infrastructural power. Assetisation studies (see Golka 2023) have already theorised how financialisation extends into non-financial domains and beyond debt and credit socioeconomic relations (Birch and Muniesa, 2020; Langley, 2020) through the creation of investable financial assets and valuation technologies. Chiapello (2015) explains that assetisation requires transforming traditional accounting and financial statement systems into financialised valuation technologies to serve actors within financialised capitalism. Ezzamel et al. (2008) demonstrated the role of accounting in value creation under the shareholder value paradigm within firms. Our theoretical framework considers the problematisation of asset creation and valuation dynamics discussed in assetisation studies but contextualises these within (a) broader earlier financialisation research focussing on firm behaviour, the issuer of assets, under specific conjunctural conditions, and (b) the instability of valuations, which are often narratively driven and lacking convincing evidence of economic fundamentals in goods markets (such as accounting profit and cash generation). Two of the banks that failed in the 2023 banking crisis served directly as wallets for early-stage firms and disruptive technology start-ups, rather than as creators of money for lending purposes. Assetised technology firms and their owners, through uninsured deposits, have become a source of financial instability. The framework of financialised valuation dynamics problematises both the conjunctural nature of assetisation and valuation, as well as the historically specific role of central bank monetary policy when analysing the burst of the disruptive technology bubble during the 2023 U.S. banking crisis. Since the 2007 GFC and the COVID-19 lockdowns, central bank monetary policy – described as quantitative easing and unconventional monetary policies – has played a significant role in recent valuation of financial assets and contributed to the operationalisation of the FVD’s power, especially in the context of the three failed banks, which grew at an extraordinary rate by aligning themselves with disruptive technology start-ups and venture capital firms.
We do not regard our theoretical framework ‘financialised valuation dynamics’ as a fixed model with rigid conceptual tools. It is flexible because the vertices that enable such dynamics can change in number and nature as financialised capitalism develops, especially after crises and the bursting of bubbles in financial markets. Nonetheless, the governance technology and ideology that determine the relationship between owners and controllers of capital tend to resist change. This suggests that banks will be managed to adhere to the rules of financialised valuation dynamics rather than those of regulators, unless they face severe financial distress and depend on liquidity and capital support from regulators.
Footnotes
Acknowledgement
We would like to thank Elsa Clara Massoc and M. Kerem Coban for co-organising the workshop on ‘Transformation of Banking since Great Financial Crisis’ at the University of St Gallen in October 2023 where the first draft of this paper was presented. We would also like to thank them on their comments on the second draft of the paper that was considered for the journal special issue that they would co-edit. We would like to thank the participants at the workshop at the University of St Gallen who commented on the first draft of the paper. We would also like to thank the anonymous referees whose comments helped us to improve the paper.
Funding
The authors received no financial support for the research, authorship, and/or publication of this article.
Declaration of conflicting interests
We declare that there are no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Data Availability Statement
Data used in writing this paper is available upon request.