Inexact Science

Share this post

SVB's Collapse

inexactscience.substack.com

SVB's Collapse

Mar 15
Share this post

SVB's Collapse

inexactscience.substack.com

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.

  1. It appears that Silicon Valley Bank failed because:

    1. It had an undiversified deposit base;

    2. It took on a lot of duration risk.

  2. 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.

  3. 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.

  4. The Fed intervened very strongly. That makes me update in two ways:

    1. It signals that contagion will be contained (good);

    2. It signals that the duration risk in the system is high (bad).

  5. 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.

  6. 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.

Thanks for reading Inexact Science! Subscribe for free to receive new posts.

Share this post

SVB's Collapse

inexactscience.substack.com
Comments
TopNew

No posts

Ready for more?

© 2023 Simas Kucinskas
Privacy ∙ Terms ∙ Collection notice
Start WritingGet the app
Substack is the home for great writing