The Danger of Forgetting the 2023 Banking Crisis
Apart from die-hard libertarians, no one seems to care much about the extent of the intervention that was needed to rescue smaller US banks in March 2023, nor has there been any broad inquiry into the circumstances that led to the vulnerabilities. As a result, several questions remain unanswered.
CHICAGO – Almost a year after the mini banking crisis in the United States, it is worth revisiting the episode. Was it just a tempest in a teacup? Was there really a systemic threat, or was it just a problem with a few banks? Should the interventions by the US Federal Reserve and Treasury worry or comfort us?
Recall that three mid-size US banks suddenly failed around March 2023. The most prominent was Silicon Valley Bank (SVB), which became the second-largest bank failure in US history (after Washington Mutual in 2008). Roughly 90% of the deposits at SVB were uninsured, and uninsured deposits are prone to runs. Making matters worse, SVB had invested significant sums in long-term bonds, the market value of which fell as interest rates rose. When SVB sold some of these holdings to raise funds, the unrealized losses embedded in its bond portfolio started coming to light. A failed equity offering then triggered a classic bank run.
It is convenient to think that these issues were confined to just a few rogue banks. But the problem was systemic.