SVB's Collapse
Confidence level: Low. I’m mostly writing this to structure and record my thoughts. However, my dissertation focused on bank runs, which gives me some familiarity with the field.
It appears that Silicon Valley Bank failed because:
It had an undiversified deposit base;
It took on a lot of duration risk.
At first, I thought, "Hey, fun story." Look at all those supposedly contrarian VCs herding like that. It felt like SVB was a very special, isolated case.
However, maybe other banks took on a lot of duration risk, too? Apparently, the Fed’s stress test in 2022 did not even consider the possibility of an interest-rate increase.
The Fed intervened very strongly. That makes me update in two ways:
It signals that contagion will be contained (good);
It signals that the duration risk in the system is high (bad).
There are difficult questions on moral hazard. If you effectively give deposit insurance to everyone, that must have some long-term consequences for risk taking.
How should we update our macro outlook? The stock market & Metaculus both think that recession risk is pretty much unchanged. The bond market suggests that central banks will be slower to increase interest rates. That probably means a higher risk of sustained inflation, but there are counteracting effects.