00:00:00
well the questions of what happened and
00:00:03
what caused the failures with Silicon
00:00:05
Valley Bank are still being worked
00:00:07
through but what is known is that the
00:00:09
potential impact from this failure and
00:00:11
as well Signature Bank could have
00:00:13
impacts well beyond the banks themselves
00:00:16
etai Goldstein is Professor of Finance
00:00:18
at the Wharton School and joins us to
00:00:20
take a deeper look at this etai great to
00:00:23
talk to you again
00:00:24
great being with you thank you
00:00:26
so a larger scale what is it that you
00:00:28
believe happened that led to the
00:00:31
collapse of SBB
00:00:33
you know what's so striking about the
00:00:35
collapse of svb is just how classic of a
00:00:39
bank run it is
00:00:41
uh you didn't have any esoteric uh
00:00:45
Investments or complicated risks it was
00:00:49
kind of a textbook of the kind of risks
00:00:53
that banks are taking
00:00:55
they did the maturity transformation
00:00:58
that banks are usually doing
00:01:01
um you know one thing I would say is
00:01:03
they didn't hedge it uh very much they
00:01:05
probably could have done uh more of that
00:01:07
at the end of the day they were exposed
00:01:09
to the risk of an interest an interest
00:01:12
rate uh increase which we all know
00:01:14
happened and this is why the value of
00:01:16
their assets uh dropped now what happens
00:01:18
in those cases is depositors can take
00:01:21
the money out at any moment and deposit
00:01:24
those here I think were a little unique
00:01:26
because depositors were all very
00:01:28
sophisticated and we're also
00:01:31
communicating with each other so the
00:01:33
rumors kind of spread like wildfire and
00:01:36
then they all decided to take their
00:01:39
money out around the same time and the
00:01:42
bank collapsed so it was really kind of
00:01:44
an old school Bank Run we thought we
00:01:47
were out of the wounds with this kind of
00:01:49
risks without the risks that we Face
00:01:51
will move in the non-bank sector but
00:01:54
then this one came and reminded us that
00:01:56
these risks are still alive so is most
00:01:59
of your focused then on the bank itself
00:02:02
and and what it what the bank did and
00:02:04
maybe the leadership of the bank and how
00:02:06
they reacted to it because there's
00:02:07
obviously a lot of other theories that
00:02:09
are being thrown out there in terms of
00:02:11
you know with the rates but how the FED
00:02:13
reacted uh you know some of the moves in
00:02:16
the questions of you know should the San
00:02:18
Francisco fed have been able to foresee
00:02:21
this and maybe able to do more
00:02:24
um you know I I think we will need to
00:02:27
look at that more going forward uh
00:02:29
certainly uh there is some blame to to
00:02:33
be shared I think some of it is the bank
00:02:35
itself but some of it is also uh what
00:02:38
Regulators could have done and uh
00:02:40
perhaps could have predicted uh you know
00:02:43
some of the regulation that was enacted
00:02:46
after the 2008 crisis was rolled back
00:02:49
and this is why a bank like uh svb was
00:02:52
not subject to such strict rules as as
00:02:55
before
00:02:57
um I think this will need to be looked
00:02:58
at uh so certainly I'm not saying that
00:03:01
others should not have seen that
00:03:04
um I was just describing the the kind of
00:03:06
portfolio and uh Dynamic among the
00:03:09
positives that I think led to the
00:03:11
immediate collapse
00:03:13
in terms of the move by the government
00:03:15
to backstop the uh the the losses that
00:03:19
were there a good move overall
00:03:22
uh I think that's a very loaded question
00:03:25
so
00:03:26
um certainly I understand where it's
00:03:29
coming from I think there was a concern
00:03:31
uh that this is going to become systemic
00:03:34
uh now I have to say uh you know svb
00:03:37
itself is not really a systemically
00:03:39
important bank it's not one of the
00:03:42
biggest banks it's the number 16 I think
00:03:45
in size in the US so it's kind of a
00:03:47
mid-sized bank and not very strongly
00:03:49
connected to other Banks so it's not
00:03:51
kind of the usual type of systemic risk
00:03:54
uh that that we are thinking about uh
00:03:57
but there was some concern because it's
00:03:59
a bank with a lot of visibility uh the
00:04:02
fact that it was so widely covered I
00:04:04
think suggested that other people in
00:04:06
other Banks could look at this and say
00:04:08
wait a second what's going on if this
00:04:10
bank is failing maybe our bank is going
00:04:12
to fail as well and then this is going
00:04:14
to trigger Bank runs across other Banks
00:04:16
so I think there was this concern there
00:04:19
was also the concern that uh the tech
00:04:21
industry a lot of the startups were
00:04:24
highly dependent on this Bank a lot of
00:04:28
small firms were holding money there
00:04:30
millions and millions of dollars and
00:04:33
payable payments dependent on what's
00:04:35
going to happen with this bank so there
00:04:37
was some concern that if there is a
00:04:39
failure of this bank and there is no
00:04:42
reaction by the government a lot of
00:04:43
firms are going to lose money and this
00:04:45
is going to trigger a crisis in the tech
00:04:47
industry and the real economy as a
00:04:49
result of that so I certainly understand
00:04:51
those concerns and the fact that the fed
00:04:53
and the government wanted to step in
00:04:55
quickly and take an action however uh
00:04:58
one has to wonder whether we needed to
00:05:01
have such a broad guarantee because
00:05:04
remember at the end of the day when you
00:05:06
think about Deposit Insurance it is
00:05:07
structured in a particular way uh in
00:05:10
short deposits are up to 250 000 uh
00:05:14
people know that if they want to keep
00:05:16
their money insured they need to keep it
00:05:18
up to that level and if they want more
00:05:20
insurance they have to spread it across
00:05:22
different banks uh now you know it's
00:05:24
very difficult to know exactly what is
00:05:27
the optimal level of Deposit Insurance I
00:05:29
worked on this myself and I know how
00:05:31
difficult it is to to pin it down but at
00:05:35
the end of the day there is uh some
00:05:37
meaning to having intrude versus
00:05:38
uninsured now when the government comes
00:05:40
in and says okay everything is
00:05:42
effectively insured from now on I think
00:05:45
that changes the the rules of the game
00:05:47
and I think that going forward this may
00:05:49
have some undesirable consequences for
00:05:52
the banking industry the way people
00:05:54
think about their Bank deposits the
00:05:56
risks that banks are taking the risks
00:05:58
that depositors are taking and and so on
00:06:01
so one has to wonder does it even mean
00:06:04
anything right now that there is a
00:06:06
Deposit Insurance limit uh what is the
00:06:08
difference between insured and uninsured
00:06:10
deposits going forward I think all these
00:06:12
questions are up in the air and and
00:06:14
we'll need will need to deal with them
00:06:16
in the aftermath of this crisis but I
00:06:18
would imagine that probably a lot of
00:06:20
banks and maybe even smaller and
00:06:22
Regional Banks were probably after this
00:06:24
started to occur looking at their own
00:06:27
sheets and making sure that they were in
00:06:29
a pretty good position so that they
00:06:31
wouldn't feel some of you know
00:06:33
potentially the same type of contagion
00:06:34
right
00:06:36
um I will assume this is the case yes I
00:06:38
think that uh you know going back to
00:06:40
what I said in the beginning uh svb did
00:06:44
not do a lot of risk management and I
00:06:46
think it could have done more uh and I
00:06:48
think that other banks are now looking
00:06:50
at what happened with SBB and probably
00:06:53
looking for the same types of risk and
00:06:55
and considering how they could change
00:06:56
that but remember once the government
00:06:58
comes in and guarantees a bunch of
00:07:01
deposits and uh make the failure less
00:07:04
painful uh then it also reduces the
00:07:07
incentive of other Banks to manage their
00:07:09
risks so this is the downside of
00:07:11
providing such a broad level of
00:07:13
guarantee and I guess that's that's
00:07:15
really a situation that is only going to
00:07:18
occur at least right now for this
00:07:20
specific case in terms of the backstop
00:07:22
provided there may be other situations
00:07:24
where it'll at least be considered and
00:07:26
reviewed as we move down the road but as
00:07:28
you said I I and I think a lot of people
00:07:30
said this as well the concern that you
00:07:33
have is that this potentially does is
00:07:36
open the door if you have full-time full
00:07:38
guarantee backstop the potential for
00:07:41
other types of activities to go on that
00:07:43
may not be in the best interest of the
00:07:45
banking sector in general yes exactly
00:07:48
and you know this is the classic moral
00:07:49
hazard problem that we keep emphasizing
00:07:52
now you know it's very easy to talk
00:07:54
about mobile Hazard uh when things are
00:07:57
calm uh in a time of a crisis you know
00:08:00
when the house is burning you're not
00:08:02
thinking about moral hazard you just
00:08:03
want to stop the fire uh and I think
00:08:06
this is the justification uh that the
00:08:09
the FED would give why they did what
00:08:11
they did however the question is whether
00:08:14
the house was indeed uh in such a severe
00:08:17
fire whether it necessitated such a
00:08:21
drastic uh move uh in 2008 for example
00:08:24
uh you know we had a crisis that lasted
00:08:27
for months and months uh before we saw
00:08:30
actions at that scale
00:08:32
um I think here uh you know this was
00:08:35
basically kind of going over a weekend
00:08:37
uh and immediately they provided this
00:08:40
level of guarantee effectively a bailout
00:08:43
so one has to wonder whether they acted
00:08:46
a little uh too too quickly they
00:08:48
certainly got worried that things are
00:08:50
going to get out of control very quickly
00:08:52
and this is why they decided to do it
00:08:55
um I think there is the concern that it
00:08:57
might have gone a little uh too far too
00:08:59
quickly
00:09:00
how much also does this and obviously
00:09:02
with what is going on with Credit Suisse
00:09:04
and and a couple of the other Banks this
00:09:06
becomes even a larger more global
00:09:09
perspective of of really kind of taking
00:09:11
a deeper dive into kind of the structure
00:09:13
and and the the deposits and and
00:09:16
everything that the bank is doing on a
00:09:18
daily basis
00:09:19
yes you know uh Credit Suisse says uh
00:09:22
now the ongoing uh episode that uh we
00:09:25
are still watching uh I think certainly
00:09:28
Credit Suisse has the potential to be a
00:09:30
much bigger issue it is a big uh global
00:09:34
bank
00:09:35
um I think it is going to be very
00:09:38
difficult to uh save uh Credit Suisse
00:09:41
given that it is so big uh so resolving
00:09:44
it is is going to be a big issue I I
00:09:47
hope uh we're watching it as we speak I
00:09:49
I hope there will be uh a good uh
00:09:53
solution with uh could it swiss but but
00:09:55
certainly if this one uh fails uh this
00:09:59
might be very painful and this can start
00:10:01
something that is much bigger than uh
00:10:03
what we had with svb uh certainly you
00:10:06
know this is the thing to watch right
00:10:07
now and and this I think is going to be
00:10:10
critical uh as to whether we are going
00:10:12
to face a bigger financial crisis or not
00:10:14
so in regards to SVP svb as this starts
00:10:19
to move forward or what are you most
00:10:21
watchful for right now what is it that
00:10:23
you're looking to see how the how this
00:10:25
will play out in the next several weeks
00:10:28
um so so I think what we are looking to
00:10:29
see is what happens with other banks
00:10:31
that are kind of similar to svb you know
00:10:34
mid-size Regional uh Banks uh to see
00:10:37
whether there are more runs down the
00:10:41
road more failures down the road
00:10:43
um this is exactly what the Fed was uh
00:10:45
trying to to stop uh when they did what
00:10:48
they did
00:10:49
um and I think uh you know it's still
00:10:51
kind of tense in the financial system I
00:10:53
think everyone is watching to see if
00:10:55
there are more failures
00:10:57
um I think SVP itself is kind of a done
00:11:00
a done deal with kind of know uh what
00:11:03
what happened to it um and and there is
00:11:05
the guarantee on it but really the big
00:11:07
question is whether this is going to
00:11:08
continue to spread uh to to other Banks
00:11:12
I I think the the other thing to watch
00:11:13
going forward that is also a very
00:11:15
important implication of uh the policy
00:11:18
that was uh enacted is uh you know what
00:11:21
what is the Fed going to do with
00:11:23
monetary policy because
00:11:26
um you know for a while now the Affair
00:11:28
is increasing rates in order to fight
00:11:30
inflation and I think the indication was
00:11:33
that it was going to continue to do that
00:11:35
because inflation was not cooling off as
00:11:38
quickly as expected we always knew that
00:11:41
there is a trade-off there is price
00:11:42
stability on the one hand and there is
00:11:44
financial stability on the other hand
00:11:46
and it was well known that as you
00:11:48
increase rates very quickly this can
00:11:51
open cracks in the financial system and
00:11:54
lead to episodes of fragility and and
00:11:57
crisis
00:11:58
um and you know for a while now rates
00:12:00
were increasing and there wasn't any
00:12:02
major cracks so I think there was the
00:12:04
hope that maybe we dodged a bullet and
00:12:07
it's not going to happen I think that
00:12:08
svb maybe above all was a very Vivid
00:12:12
reminder that this risk is there and
00:12:14
that this is a very real uh trade-off so
00:12:18
I think the other interesting uh
00:12:20
interesting thing to watch going forward
00:12:21
is what the FED is going to do with the
00:12:23
interest rate and to what extent the FED
00:12:25
will continue with Titan meaning the
00:12:28
monetary policy
