In a recent analysis, professors Anat Admati, Martin Hellwig, and Richard Portes present a scathing critique of the U.S. banking sector’s systemic issues, brought into focus by the 2023 banking crisis. Their analysis, in particular, centers around the failure of Silicon Valley Bank (SVB) and First Republic Bank, highlighting the systemic issues afflicting U.S. banks.
The analysis suggests that the crisis in U.S. banking is systemic, not because of the interconnectedness of banks, but due to similar banking strategies they’ve adopted. SVB’s failure in March 2023, following a run on deposits, is a case in point.
In 2019, SVB’s financials showed $62 billion in deposits, $33 billion in loans, and $29 billion in securities. Fast forward to March 2022 and the bank’s deposits had tripled, with loans and securities also experiencing significant growth. However, the Federal Reserve’s decision to raise interest rates in 2022 started a chain reaction. Investors gradually moved from deposits to money market investments that paid higher interest. By March 2023, the bank had incurred losses on securities and was unable to raise more equity, prompting a massive run that led to its closure….