2023 Banking Turmoil

Looking back at the March 2023 collapse of Silicon Valley Bank and the subsequent banking crisis, Stephen G. Cecchetti and Kermit L. Schoenholtz highlight two lessons that should guide the reform of bank regulation.

The 2023 banking crisis that took down four banks, including Silicon Valley Bank, by all appearances appears to have been resolved by public intervention. Yet, Viral Acharya and Raghuram Rajan argue, this leaves many of the underlying weaknesses that contributed to the bank failures unaddressed. Moreover, while the authorities’ temporary fixes have stopped the panic, the system will have to absorb more unrecognized losses over time.

Due to a change in how the FDIC resolves failed banks, uninsured deposits have become de facto insured. Not only is this dangerous for risk in the banking system, it is not what Congress intends the FDIC to do, writes Michael Ohlrogge.

Capital markets are central to capitalism and the functioning of the US economy. Yet, short-selling, an integral part of price discovery in capital markets, has been blamed as a contributor to the recent banking crisis. Lawmakers and interest groups have labeled short sellers opportunists who prey on small investors and the public without justification. The authors shed light on this debate and question the merit of the allegations.

To what degree did banks’ equity price declines trigger deposit withdrawals at recently failed banks? To what degree did the withdrawals trigger declining bank equity prices? Hamid Mehran and Chester Spatt note that in either case, short-selling is not to blame and is, in fact, an essential part of a well-functioning market.

The subsidized emergency takeover of Credit Suisse by UBS brings the current global "too big to fail" regime into question. This column argues that an in-depth analysis of the global resolution framework by both regulators and academics is needed. The main question is whether a resolution of a global systemically important bank is indeed feasible in plausible scenarios. An affirmation would clearly be the best possible result of this analysis. However, if such a resolution proves not to be realistic, then there should be no hesitation to drastically reduce the global risks of such institutions via regulation of their business models.

Adopting a deferred pay scheme for bank managers would provide them with needed funding during a downturn and would incentivize more conservativism when it comes to risk-taking.

Following a widely cited report on unrecognized bank losses due to interest rate rises, Amit Seru and his co-authors have taken a close look...

Following up their recent analysis of risk in the banking system, DeMarzo, Jiang, Krishnamurthy, Matvos, Piskorski and Seru argue that banks should be required...

Laurence Kotlikoff and Rick Miller argue that banking as we know it is dying. It’s time to arrange a smooth transition to limited purpose...