SVB and Beyond: The Banking Stress of 2023
The Volatility and Risk Institute is proud to publish SVB and Beyond: The Banking Stress of 2023, a book by NYU Stern Faculty members, Viral V. Acharya, Richard Berner, Thomas Philippon, Mathew P. Richardson, Stephen G. Ryan, Alexi Savov, Philipp Schnabl, Kermit L. Schoenholtz, Bruce Tuckman, and Lawrence J. White, and their collaborators, Stephen G. Cecchetti (Brandeis University), Sehwa Kim (Columbia University), and Seil Kim (Baruch College).
In March 2023, depositor runs quickly led to the failures of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank. In the wake of higher interest rates, their uninsured depositors had lost confidence in the business model of taking in deposits and investing the proceeds in long-term assets to generate a term-spread carry. Deposit flight also threatened many other small and midsized banks.
While the largest, likely too-big-to-fail, banks—even those with business models seeking interest-rate risk—have gained in part at the expense of the troubled banks, the systemic risk indicator at NYU Stern VLAB (SRISK) suggests that the market-implied capital shortfall of the aggregate banking system has risen from $457 billion in February 2023 to $926 billion at present, that is, by more than $450 billion.
Will depositor outflows from smaller and regional banks stop anytime soon? Is there regulatory and supervisory capacity to deal with a large number of bank failures were they to materialize? Will regulators respond with alacrity and raise confidence in bank solvency and liquidity, or will they kick the can down the road? Can banks deal with the added complication in the form of a tsunami of impending commercial real estate losses, perhaps even auto loan and credit card delinquencies, as a likely economic recession finally arrives? Or will there be a credit crunch, some bad zombie loans, and a disappointing recovery?
SVB and Beyond provides a diagnosis and organizing framework to understand the banking stress of 2023, as well as a collection of policy proposals to ensure financial resilience in its wake. The authors use the multiple lenses of economics, regulation, and accounting to understand the complex functioning of banks (and more generally, bank holding companies and similar financial institutions) and, in turn, to assess the efficacy of their business models from a societal or systemic risk standpoint.
Table of Contents
Prelude - Viral V. Acharya, Matthew P. Richardson, Kermit L. Schoenholtz, and Bruce Tuckman
Summary of Contents - Viral V. Acharya
PART I: The Banking Stress of 2023
Chapter 1: Overview of Recent Banking Stress - Viral V. Acharya, Stephen G. Cecchetti and Kermit L. Schoenholtz
Chapter 2: Underlying Macroeconomic Causes of Recent Banking
Stress - Viral V. Acharya, Stephen G. Cecchetti, Kermit L. Schoenholtz, and Lawrence J. White
Chapter 3: Banks, Interest Rate Risk and Systemic Risk -- Theoretical and Historical Perspectives - Matthew P. Richardson, Alexi Savov and Philipp Schnabl
Chapter 4: Silicon Valley Bank: Failures in "Detective" and "Punitive" Supervision Far Outweighed the 2019 Tailoring of Preventive Supervision - Bruce Tuckman
- Chapter 5: Evaluation of the Policy Response: On the Resolution of Silicon Valley Bank, Signature Bank, and First Republic Bank - Richard Berner, Kermit L. Schoenholtz, and Lawrence J. White
PART II: Proposals for Reform
- Chapter 6: Restoring Confidence in the Banking System with a Stagflation Stress Test - Viral V. Acharya
- Chapter 7: Expanding Mark-to-Market Accounting for Banks’ Debt Investment Securities and Regulatory Capital - Sehwa Kim, Seil Kim, and Stephen G. Ryan
- Chapter 8: Revisiting the Design of Deposit Insurance - Stephen G. Cecchetti, Thomas Philippon, Kermit L. Schoenholtz, and Lawrence J. White
- Chapter 9: The FHLB Role in the SVB and Related Debacles - Stephen G. Cecchetti, Kermit L. Schoenholtz, and Lawrence J. White
- Chapter 10: Strengthening Supervisory and Resolution Frameworks - Richard Berner
- Appendix: Liquidity Risk in Nonbank Financial Institutions and in Systemically Important Markets - Richard Berner
NYU Stern Faculty and their collaborators provide a diagnosis and organizing framework to understand the banking stress of 2023, as well as a collection of policy proposals to ensure financial resilience in its wake.