SVB and Beyond: The Banking Stress of 2023

SVBandBeyond: TheBankingStressof2023 RAPIDRESPONSE ECONOMICS 4 Editedby ViralV.AcharyaMathewP.RichardsonKermitL.SchoenholtzBruceTuckman SVBandBeyond:TheBankingStressof2023 CEPRPRESS CentreforEconomicPolicyResearch 187boulevardSaint-Germain|75007,Paris,France33GreatSuttonStreet|London,EC1V0DX,UK Email:cepr@cepr.orgWeb:www.cepr.org ISBN:978-1-912179-76-3 RapidResponseEconomicsSeries,Copyright©CEPRPress,2023. WITHSUPPORTOFCEPRPARISFOUNDINGPARTNERS SVBandBeyond:TheBankingStressof2023 Editors: ViralAcharya,NewYorkUniversity,SternSchoolofBusiness,andCEPR MathewP.Richardson,NewYorkUniversity,SternSchoolofBusiness KermitL.Schoenholtz,NewYorkUniversity,SternSchoolofBusiness,andCEPR BruceTuckman,NewYorkUniversity,SternSchoolofBusiness ContributingAuthors ViralV.Acharya,NewYorkUniversity,SternSchoolofBusiness,andCEPR RichardBerner,NewYorkUniversity,SternSchoolofBusiness StephenG.Cecchetti,BrandeisInternationalBusinessSchoolandCEPR SehwaKim,ColumbiaBusinessSchool SeilKim,ZicklinSchoolofBusiness,BaruchCollege,NewYork ThomasPhilippon,NewYorkUniversity,SternSchoolofBusiness,andCEPRMatthewP.Richardson,NewYorkUniversity,SternSchoolofBusinessStephenG.Ryan,NewYorkUniversity,SternSchoolofBusiness AlexiSavov,NewYorkUniversity,SternSchoolofBusiness PhilippSchnabl,NewYorkUniversity,SternSchoolofBusiness,andCEPRKermitL.Schoenholtz,NewYorkUniversity,SternSchoolofBusiness,andCEPRBruceTuckman,NewYorkUniversity,SternSchoolofBusiness LawrenceJ.White,NewYorkUniversity,SternSchoolofBusiness CENTREFORECONOMICPOLICYRESEARCH(CEPR) TheCentreforEconomicPolicyResearch(CEPR)isanetworkofover1,700researcheconomistsbasedmostlyinEuropeanuniversities.TheCentre’sgoalistwofold:topromoteworld-classresearch,andtogetthepolicy-relevantresultsintothehandsofkeydecision-makers.CEPR’sguidingprincipleis‘Researchexcellencewithpolicyrelevance’.ItwasfoundedintheUKin1983,whereitisaCharity,andinNovember2019CEPRinitiatedthecreationofanAssociationunderFrenchlaw,inordertoprovideavehicleforanexpansioninFrance.ThemembersoftheConseild’AdministrationoftheAssociationareidenticaltotheUKBoardofTrustees. CEPRisindependentofallpublicandprivateinterestgroups.IttakesnoinstitutionalstandoneconomicpolicymattersanditscorefundingcomesfromitsInstitutionalMembers,projectsthatitrunsandsalesofpublications.Becauseitdrawsonsuchalargenetworkofresearchers,itsoutputreflectsabroadspectrumofindividualviewpointsaswellasperspectivesdrawnfromcivilsociety.CEPRresearchmayincludeviewsonpolicy,buttheTrustees/membersoftheConseild’AdministrationoftheAssociationdonotgivepriorreviewtoitspublications.TheopinionsexpressedinthisreportarethoseoftheauthorsandnotthoseofCEPR. ChairoftheBoardSirCharlieBeanFounderandHonoraryPresidentRichardPortes President VicePresidents ChiefExecutiveOfficer BeatriceWederdiMauroMaristellaBotticiniPhilippeMartin UgoPanizzaMarReguantHélèneReyTessaOgden ThisdocumentwascreatedbyateamoffacultyfromtheNYUSternSchoolofBusiness,andincludescontributionsfromseveralnon-NYUcolleagues. ThisversionwascompletedonJuly3,2023. Copyright©2023bytheVolatilityandRiskInstituteofNewYorkUniversitySternSchoolofBusiness ThisworkislicensedundertheCreativeCommons4.0 Attribution-NonCommerciallicense.Toviewacopyofthelicense,visit:https://creativecommons.org/licenses/by-nc/4.0/ NYUSternthankJudyDiClementeforsuperblyeditingthemanuscript,AndreaSpaarforexcellentdesignandproductionwork,andQuirinFleckensteinandStefanoPastorefordiligentproof-readingandresearchassistance.Thisreportreflectstheopinionsoftheauthors,notoftheNYUSternSchoolofBusiness. Contents Preludevii PartI:TheBankingStressof2023 1OverviewofRecentBankingStress1 ViralV.Acharya,StephenG.CecchettiandKermitL.Schoenholtz 2UnderlyingMacroeconomicCausesofRecentBankingStress14 ViralV.Acharya,StephenG.Cecchetti,KermitL.Schoenholtz,andLawrenceJ.White 3Banks,InterestRateRiskandSystemicRisk-Theoretical andHistoricalPerspectives33 MatthewP.Richardson,AlexiSavovandPhilippSchnabl 4SiliconValleyBank:Failuresin“Detective”and“Punitive” SupervisionFarOutweighedthe2019TailoringofPreventiveSupervision70 BruceTuckman 5EvaluationofthePolicyResponse:OntheResolutionof SiliconValleyBank,SignatureBank,andFirstRepublicBank94 RichardBerner,KermitL.Schoenholtz,andLawrenceJ.White PartII:ProposalsforReform 6RestoringConfidenceintheBankingSystemwith aStagflationStressTest110 ViralV.Acharya 7ExpandingMark-to-MarketAccountingforBanks’DebtInvestmentSecuritiesandRegulatoryCapital127 SehwaKim,SeilKim,andStephenG.Ryan 8RevisitingtheDesignofDepositInsurance148 StephenG.Cecchetti,ThomasPhilippon,KermitL.Schoenholtz,andLawrenceJ.White 9TheFHLBRoleintheSVBandRelatedDebacles173 StephenG.Cecchetti,KermitL.Schoenholtz,andLawrenceJ.White 10StrengtheningSupervisoryandResolutionFrameworks188 RichardBerner Appendix:LiquidityRiskinNonbankFinancialInstitutionsandinSystemicallyImportantMarkets210 RichardBerner “TherealpurposeofthescientificmethodistomakesureNaturehasn’tmisledyouintothinkingyouknowsomethingyoudon’tactuallyknow…Onefalsedeductionaboutthemachineandyoucangethungupindefinitely.” –John