SVB and Beyond: The Banking Stress of 2023

Abstract

Starting in March 2023, depositor runs quickly led to the failures of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank. In the wake of higher interest rates, uninsured depositors of these banks had lost confidence in their business model of taking in deposits and investing the proceeds in long-term securities to generate a term-spread carry. Many other banks, some smaller and some bigger replicas of these three banks, experienced slower depositor runs or are still experiencing deposit outflows.

Will depositor outflows from smaller and regional banks stop anytime soon? Is there regulatory and supervisory capacity to deal with a large number of bank failures were they to materialize? Will regulators respond with alacrity and raise confidence in bank solvency and liquidity, or will they kick the can down the road? Can banks deal with the added complication in the form of a tsunami of impending commercial real estate losses, perhaps even auto loan and credit card delinquencies, as a likely economic recession finally arrives? Or will there be a credit crunch, some bad zombie loans, and a disappointing recovery?

This book, with interdisciplinary contributions from several faculty members at the New York University Stern School of Business (NYU Stern) and several non-NYU colleagues, attempts to provide a balanced diagnosis and organizing framework to understand the banking stress of 2023 (Chapters 1-5), as well as a collection of policy proposals to ensure financial resilience in its wake (Chapters 6-10). The book concludes that (i) a reasonable working model to understand the ongoing banking stress must triangulate a comprehensive understanding of three aspects -- namely, economics, regulation, and accounting -- in the present context, of interest-rate risk management by banks; and that, (ii) sound banking sector policy in response to this stress should aim to remain adaptive, nuanced and robust, in particular by recognizing the inevitable risk that risks stressing the banking sector keep changing over time.

Keywords: Regional Banking Crisis, Uninsured Deposits, Bank Runs, Silicon Valley Bank, Signature Bank, First Republic Bank, Interest Rate Risk Management, Stagflation Stress Test, Deposit Insurance, Mark to Market Accounting, Federal Home Loan Banks, Bank Supervision

JEL Classification: G01, G21, G28, E5