Experience Stern | Faculty & Research

In his recent testimony to Congress, Federal Reserve Chairman Jerome Powell said, “The ultimate level of interest rates is likely to be higher than previously anticipated,” and “restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.” How the financial world has changed since then.

Silicon Valley Bank and Signature Bank, with about $200 billion and $100 billion in assets, respectively, collapsed. Over 90% of the deposits of Silicon Valley Bank and Signature Bank were uninsured. Uninsured deposits are understandably prone to runs. Moreover, both banks had invested significant amounts in long-term bonds. So, with the rapid rise in interest rates, the value of their bond portfolios fell. When SVB sold some of these bonds to raise funds, the losses embedded in its bond portfolio started coming to light, setting off the depositor run that led to its closure.

The worry is that other banks may have the toxic combination of long-term interest-sensitive assets funded by short-term runnable deposits. If depositors remain panicky, more small and medium banks could go under. After all, which corporate treasurers would want to confess to their CEOs that they have not moved corporate deposits to a rock-solid large bank, knowing the stress that Silicon Valley Bank’s clients faced? No wonder the government backed all deposits.

Read the full Barron's article.

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Viral Acharya is the C.V. Starr Professor of Economics