When will they ever learn?

London Business School’s Professor Richard Portes, Anat Admati, Professor of Finance and Economics at the Stanford Graduate School of Business at Stanford University, and Martin Hellwig, Director (em.) at Max Planck Institute for Research on Collective Goods, explore the US banking crisis in the VoxEU/CEPR article, When will they ever learn? The US banking crisis of 2023.

While Silicon Valley Bank was in some ways a special case, the ultimate cause of the run on the bank was a solvency problem, which was, and is, not unique to SVB, argue the authors. The article argues that US authorities should acknowledge the evident banking crisis and suggests reforms to address the underlying solvency problems.

The crisis in US banking is ‘systemic’, concerning a large part of the banking system not because banks are so interconnected but because they have followed similar strategies and are now in a similar bind. SVB is an extreme example, but the difficulties of SVB suggest lessons about other banks in the US and elsewhere.

During the week of March 6, 2023, several financial institutions began to strain under the cost pressure exerted by an increase in short-term interest rates. Apparently, having underestimated the negative impact on its balance sheets, Silvergate Bank announced plans to wind down and self-liquidate one day before a run on deposits began at SVB.

SVB was closed by the California Department of Financial Protection and Innovation (DFPI) on March 10, 2023, and Signature Bank was closed by the New York Department of Financial Services (NYDFS) two days later on March 12, 2023. The deposits at these banks, which catered to venture capital firms and their portfolio, were heavily weighted towards deposits that were large and mostly uninsured.

On May 16, Gregory Becker, the former President of Silicon Valley Bank who was fired from SVB shortly after its March failure, attracted bipartisan criticism for his explanations during testimony before a Senate Banking Committee.

Though Mr. Becker repeatedly said that SVB’s unwinding was unforeseeable, senators took a less favourable view of his decision-making.