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Discussion Paper
Factors that Affect Bank Stability
In a previous Liberty Street Economics post, we introduced a framework for thinking about the risks banks face. In particular, we distinguished between asset return risk and funding risk that can interact and cause a bank to fail. In our framework, a bank can fail for two reasons: 1-Low asset returns: Fundamental insolvency due to erosion of equity by low asset returns that don’t cover a bank’s debt burden. 2-Loss of funding: Costly liquidation of assets that erode equity.
Journal Article
Understanding the Speed and Size of Bank Runs in Historical Comparison
Bank runs have always been fast, but today’s runs are even faster.
Discussion Paper
Banking System Vulnerability: 2022 Update
To assess the vulnerability of the U.S. financial system, it is important to monitor leverage and funding risks—both individually and in tandem. In this post, we provide an update of four analytical models aimed at capturing different aspects of banking system vulnerability with data through 2022:Q2, assessing how these vulnerabilities have changed since last year. The four models were introduced in a Liberty Street Economics post in 2018 and have been updated annually since then.
Working Paper
Too-Big-to-Fail before the Fed
?Too-big-to-fail? is consistent with policies followed by private bank clearing houses during financial crises in the U.S. National Banking Era prior to the existence of the Federal Reserve System. Private bank clearing houses provided emergency lending to member banks during financial crises. This behavior strongly suggests that ?too-big-to-fail? is not the problem causing modern crises. Rather, it is a reasonable response to the threat posed to large banks by the vulnerability of short-term debt to runs.
Report
Reducing moral hazard at the expense of market discipline: the effectiveness of double liability before and during the Great Depression
Prior to the Great Depression, regulators imposed double liability on bank shareholders to ensure financial stability and protect depositors. Under double liability, shareholders of failing banks lost their initial investment and had to pay up to the par value of the stock in order to compensate depositors. We examine whether double liability was effective at mitigating bank risks and providing a safety net for depositors before and during the Great Depression. We first develop a model that demonstrates two competing effects of double liability: a direct effect that constrains bank risk ...
Journal Article
Opinion: Why Do Bank Runs Happen?
The first half of 2023 has reminded us once again that banks are not immune from failure. In early March, Silicon Valley Bank (SVB) suffered a run on deposits and quickly collapsed. Its closure was followed by the failure of Signature Bank, a smaller bank, two days later. And even more recently, regulators exerted considerable effort to arrange the sale of First Republic Bank to a larger bank. The Fed was responsible for supervising and regulating SVB, and it recently issued its report examining what went wrong. I encourage you to take a look.
Discussion Paper
Why Large Bank Failures Are So Messy and What to Do about It?
If the Lehman Brothers failure proved anything, it was that large, complex bank failures are messy; they destroy value and can destabilize financial markets. We certainly don’t mean to trivialize matters by calling large bank failures “messy,” as it their messiness, particularly the destabilizing aspect, that creates the “too-big-to-fail” problem. In our contribution to the Economic Policy Review volume, we venture an explanation about why large bank failures are so messy and discuss a policy that can make them less so.
Briefing
Preventing Bank Runs
Banking can be defined as the business of maturity transformation, or "borrowing short to lend long." Economists and policymakers have long viewed banking as inherently unstable, that is, prone to runs. This Economic Brief reviews the intuition and theory behind bank runs and the most popular proposed solutions. It also explores new research suggesting that runs might be prevented by creating a new, low-cost type of deposit contract that eliminates the incentive to run.
Journal Article
Interest Rate Risk, Bank Runs and Silicon Valley Bank
An analysis explains some of the causes and consequences of bank runs, as well as policies that help safeguard banks’ solvency.
Discussion Paper
Banks Runs and Information
The collapse of Silicon Valley Bank (SVB) and Signature Bank (SB) has raised questions about the fragility of the banking system. One striking aspect of these bank failures is how the runs that preceded them reflect risks and trade-offs that bankers and regulators have grappled with for many years. In this post, we highlight how these banks, with their concentrated and uninsured deposit bases, look quite similar to the small rural banks of the 1930s, before the creation of deposit insurance. We argue that, as with those small banks in the early 1930s, managing the information around SVB and ...