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