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Verbatim | ’Game’s the Same, Just Got More Fierce’

From SVB’s perspective, the supersonic speed of the run probably did not matter much... But from the FDIC’s perspective, the speed mattered a great deal. 
Bank runs

Equities occasionally publishes verbatim comments and writing by public officials and others when they shed light on topics we care about. Below are three excerpts from Federal Reserve Vice Chairman Travis Hill’s remarks on “The Recent Bank Failures and the Path Ahead,” given at an April meeting of the Bipartisan Policy Center. For the full text, go here.

Not Your Grandfather’s Bank Run

… [In] Silicon Valley Bank, we have a simple story: the bank took a big gamble on interest rates and lost, and its uninsured depositors panicked. And once the run started, it accelerated much faster than anything the U.S. banking sector had seen before.

Historically, bank runs have often, though not always, been fast. People tend to move with urgency if they think their money is at risk. In the old days, before computers and smartphones, depositors had to travel to the bank and wait in line to get their money out, and banks deployed various strategies to slow a run and restore confidence – sometimes successfully and sometimes not. 

As the years passed, and technology and communications improved, the nature of bank runs evolved too. In the 1980s, the two largest bank failures were Continental Illinois and First Republic Bank of Dallas. In May 1984, Continental Illinois was the victim of what the FDIC described as a “high–speed electronic bank run.” Similar to SVB and Signature, more than 90 percent of its deposits were uninsured. The run lasted for eight days, until federal regulators broke the run by announcing that the FDIC would provide assistance. 

Four years later, First Republic Bank of Dallas experienced a similar electronic run in which corporate depositors, primarily small Texas banks, withdrew $1 billion in a single morning. Then–FDIC Chairman Bill Seidman described it as “a real bank run, even if dressed up in high–tech garb.”

Two decades later, Washington Mutual (WaMu) experienced two “silent” deposit runs, the first after the failure of IndyMac in July 2008, and a second that took off after the September failure of Lehman Brothers. Rather than stand in line at branches, retail customers used ATMs and the internet to withdraw funds. At its peak, WaMu lost $2.8 billion in deposits in a single day, a massive figure three times larger than the total withdrawals over the 11–day run at IndyMac, yet 15 times smaller than the $42 billion pulled from SVB in one day, and six times smaller than the amount withdrawn from Signature Bank the following day. Game’s the same, just got more fierce.

On the morning of Thursday, March 9th, SVB looked to most like it still had a long life to live, but by that night, the question was whether the bank would be shut down Friday morning or Friday evening. From SVB’s perspective, the supersonic speed of the run probably did not matter much: whether the run took six hours or six days, once confidence was lost, it was gone. But from the FDIC’s perspective as the resolution authority, the speed mattered a great deal. 

The Role of 2018’s Regulatory Relief Act in SVB’s Collapse

I have talked about the SVB failure, its causes, and a few lessons learned.  Now I am going to talk about something that is none of those things. In Washington, D.C., a town where people tend to criticize and blame first, and learn and understand later… or never, there has been an effort to blame the SVB failure on S. 2155, the bipartisan banking law passed in 2018. And so we have people searching under the couch cushions… under the carpets… under the mattress… in the storage closet… hoping to find something somewhere tying the SVB failure to that law and its implementing rules. 

I think it is quite obvious that S. 2155 had nothing to do with it. The rule changes did not change the stringency of capital standards for a bank of SVB’s size, the stress tests did not test for rapidly rising rates, and the exact thing that got SVB in trouble – investing in government bonds – is exactly what the liquidity coverage ratio is designed to require. The reasons for SVB’s failure are quite straightforward and easy to explain, and those rule changes had nothing to do with them. 

When it comes to something like this, I encourage people to first look at the facts, and then arrive at conclusions, rather than starting with a conclusion you hope to be true, and grasping around for facts in support. And I urge policymakers to propose policy changes based on where we find evident holes in our framework, rather than just trying to undo policies of the past. 

Somebody’s Gotta Do It

Financial regulators are often accused of fighting the last war. Over the past couple years, a number of banks, under the watchful eyes of supervisors, traded credit risk – the problem of the last crisis – for interest rate risk – a problem of the previous crisis. We should closely review the lessons to be learned from the recent failures, and be open to targeted changes to our framework, but we should be humble about what our rules and policies can accomplish, and avoid the temptation to overcorrect. In a competitive, dynamic financial services industry with thousands or millions of independent actors, there will always be vulnerabilities, and in an era of aggressive Fed tightening, there will always be bigger pressures at play. 

Meanwhile, the FDIC keeps doing its job, as it has for the past 90 years. The FDIC staff deserves tremendous credit for their efforts over the past month, with many working through the night, night after night, and through the weekends, weekend after weekend. I will conclude with my favorite quote from one of the stories on the recent banking turmoil: when the Wall Street Journal interviewed a customer who had just confirmed his bank deposit was fully insured, he told the newspaper, “If you can’t trust the FDIC, it is a banana republic.”

Any change significant enough to matter draws vigorous opposition from those who depend on the status quo.
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