Three bank failures made headlines in 2023: Silicon Valley Bank (SVB) and Signature Bank (SB) in March and First Republic Bank (FRB) in May. The failures triggered a great deal of soul searching by the federal regulators primarily responsible for overseeing the institutions, the Federal Reserve and the Federal Deposit Insurance Corporation. Their missteps were the most recent examples of more than a century of banks behaving badly and federal supervisors failing in their most basic oversight responsibilities.

In late April, after the first two failures, the two federal overseers released separate reports assessing what happened and why. The Government Accountability Office, a more independent arbiter than the conflicted federal regulators, also weighed in with a report. The GAO put the blame squarely on breakdowns by the banks’ management teams and the supervisors who identified many of the percolating problems but took very few of the critically important follow-through measures to promptly shut down the banks.

New York University’s Stern School of Business has now released SVB and Beyond, its own review of the three failures. The book is a collaboration of contributions from 13 scholars affiliated with Stern, most prominently economists Viral V. Acharya, a professor and former deputy governor of the Reserve Bank of India, Richard Berner, co-director of NYU’s Volatility and Risk Institute and former director of the U.S. Treasury Department’s Office of Financial Research, and Lawrence J. White, formerly a board member of the Federal Home Loan Bank Board and Freddie Mac.

I don’t often review books of this genre: an academic compilation by numerous authors. For me, these works typically do not have the cohesiveness of a book drafted by one or two authors. This book suffers from that weakness and would have been more focused and effective without a few of the chapters. Still, there is much to recommend it. For this review, I will concentrate on the chapters that I found to be most targeted to the topic. As its title implies, an outsized share of the book is committed to SVB, which was overseen by the Federal Reserve and California’s banking authority, while SB and FRB were overseen by the FDIC and state authorities.

Overview and causes / The authors present a good summary of what produced the bank failures:

  • Bank reliance on volatile, uninsured, on-demand mega-deposits that made the banks vulnerable to a run (for example, the top 10 depositors in SVB held a combined $13 billion), particularly those deposits held by borrowers in speculative, stressed sectors.
  • Monetary and fiscal accommodation, resulting in deposit inflows that later reversed during the contractionary phase.
  • Bank management teams seemingly incapable of navigating the challenging, Fed-induced interest rate risk environment.

One grating thing about the book is the constant reference to the episode as a “panic.” The term “panic” is not defined by the authors, but it implies a lack of rationality on the part of depositors who are draining funds not only from weak banks, but also strong banks. The overview chapter uses “panic” seven times to describe the circumstances in early 2023, but there isn’t any supporting analysis for the characterization that individual, healthy banks were likewise at risk of runs. It was entirely rational for many depositors to withdraw funds from, as the authors describe it, “banks that shared [SVB and SB’s] fragilities.”

The first line of a chapter dedicated to the supervision of SVB states the obvious: “Supervision clearly failed to avert the failure of Silicon Valley Bank.” The chapter goes on to detail what the authors classify as “detective” and “punitive” supervision of SVB: the former involves the scrutiny of larger banks that are undertaking unsafe and unsound practices that may lead to significant losses or insolvency, and the latter involves compelling banks to alter behavior unearthed through detective supervision. The authors rightly call the Fed on the carpet for “the egregious failures of detective and punitive supervision of SVB as documented by the Federal Reserve” in its own report on supervision and regulation of SVB and break down their analysis based on the detective and punitive supervision distinctions. They note the need to “significantly improve the culture and practice of detective and punitive supervision.”

Plans for resolution / The authors also delve into a common point of policy disagreement about the failure of SVB: “the 2019 Tailoring.” This describes legislative and regulatory reforms led by the Trump administration intended to reduce the burden of select Dodd–Frank Act regulations on banks whose failure would have a limited systemic effect. This was done by tailoring regulations to the individual risk profiles of domestic and foreign banks. Many critics of the Trump administration like to blame the tailoring adjustments and a so-called “cultural shift” during the Trump years that accompanied the tailoring changes for allowing SVB to slip through the regulatory cracks. The authors are skeptical of that criticism, concluding:

Allegations of an enervating cultural shift in supervision concurrent with the 2019 Tailoring are hard to assess…. There does not seem to have been any specific rule of the [Dodd–Frank Act] loosened by the 2019 Tailoring that would likely have averted SVB’s failure.

The 2019 Tailoring exempted SVB’s holding company from a requirement under the Dodd–Frank Act for submitting a resolution plan to the Federal Reserve. There was still a requirement that the bank itself submit a plan to the FDIC. Citing the GAO’s analysis that “SVB’s plan was deficient in failing to identify potential buyers for either the whole or parts of the bank,” the authors note that the FDIC’s review of the plan took five to six months. The FDIC staff reviewed the plan in early 2023, but the FDIC Board had not even provided formal feedback before SVB’s failure. I would argue that the FDIC, as resolution authority, should draft resolution plans rather than entrusting them to the banks themselves.

Much of the critique by the authors on the policy response to SVB, SB, and FRB is on point and encapsulates the incompetence of the banking authorities:

The unprecedented speed of the run is not a compelling justification for a lack of preparedness…. The authorities had several months during which they should have assessed SVB’s potential losses, identified the lowest-cost means of cleaning up the bank, and begun to identify a list of potential buyers of a “good bank” with the goal of being able to conduct an effective auction on very short notice.

A resolution timeline at the end of the chapter is also helpful. For example, the FDIC and the California agency overseeing state-chartered banks designated FRB as a “problem bank” on April 28, 2023. Problem bank status is supposed to be applied many months before a bank could fail, to prompt measures to allow the bank to recover from its troubled state. Yet FRB failed just three days after the designation, far too late for it to serve any useful purpose.

Much of the remainder of the assessment of the policy response is wishy-washy and not very well supported:

The combination of an ongoing panic and the lack of a buyer … probably was sufficient to motivate the authorities’ decision to invoke a systemic risk exception to protect all depositors of SVB and SB. In such circumstances, it is doubtful whether any policymakers would risk a broader banking collapse by failing to exercise such discretion when they have the authority to do so.

Unfortunately, the authors evade the obvious question of whether the authorities’ chosen path was the right one.

The described systemic risk exception—the agreed resolution option of the Fed, FDIC, and Treasury—moves the decision-making from a technocratic decision of the least-cost resolution option to a political decision left in the hands of political appointees—in this case, mostly Democrats but also a few Republicans. The authors do not identify any specific problems beyond the failure of the three banks to justify this policy change or explain how the change would be helpful. They do note that “the S&P Regional Banks stock index plunged by more than 20% from March 8 to March 13.” But this was not a systemic run on the banking sector but rather a run on the business model of a few banks—an event that should have triggered the swift shuttering of all insolvent banks relying on that business model without the bailout of millionaire and billionaire uninsured depositors.

Deposit insurance / At the core of the authorities’ response was their strategy to completely ignore the very clear statutory deposit insurance limit: $250,000 per depositor, per insured bank, for each ownership category. Those sympathetic to the response of bailing out all uninsured depositors take the view that $250,000 is simply not a sufficient level of coverage. The authors set out three potential options for FDIC insurance going forward, which they draw from a May 2023 FDIC report:

  • Set coverage at $250,000 or some higher, justifiable level below 100 percent coverage.
  • Expand the first option through increased coverage for transaction accounts of small and medium enterprises (SMEs).
  • Institute 100 percent coverage.

After a lot of hemming and hawing about the pros and cons for each of these options, the authors settle on the second: “The most promising avenue for further exploration is Option B, a targeted increase for SME payments.” They really don’t convincingly support this conclusion for a potentially massive expansion of the federal financial safety net. The authors seem to throw up their arms, as if to say let’s just go with Option B. They highlight the pros of such a move (e.g., SMEs don’t have the scale to manage cash like large firms, the risk exposure of payroll of SMEs) and the cons (e.g., targeting deposit insurance coverage and specifying eligibility criteria for SMEs are complex). But there is no serious exploration of how the SMEs could rely on a private sector solution through deposit brokers to address their needs, a notion the authors raise only very briefly in the chapter (with a reference to private insurer Intrafi). This was just a poorly written and reasoned chapter.

FHLB lending / The Federal Home Loan Banks (FHLBs), like Fannie Mae and Freddie Mac, are government-sponsored enterprises that provide funding to financial institutions for targeted purposes and have the implicit backing of the federal government. All have a long history of distorting borrowing markets and risk assessment.

According to the authors, in the case of the three bank failures, the FHLBs in San Francisco and New York “played an enabling role in delaying the regulatory reckonings and increasing the costs of the [FDIC] resolutions for [SVB, SB, and FRB].” The three failed banks borrowed modest sums because of their relatively smaller size compared with mega-banks, with SVB’s, SB’s and FRB’s borrowing peaking at $15 billion, $11 billion, and $28 billion respectively (based on available quarterly and annual data). In comparison, during the 2008–2009 financial crisis, Citigroup borrowed upward of $80 billion during its near failure.

The authors show how, in the case of SVB, FHLB borrowings in 2022 essentially replaced an equivalent amount of deposit outflows. The borrowings thus “were critical in keeping the banks afloat…. The banks were gambling for resurrection on the back of mispriced government-sponsored financing.” The authors rightly conclude that if the FHLB advances had not been available, all three of the banks “would have experienced financial difficulties earlier.” They also conclude that “the FDIC might have become aware earlier that these banks were experiencing difficulties and would have had more time to prepare an orderly (and less costly) resolution process.”

Conclusion / SVB and Beyond is a good first effort by observers outside of government to develop a thorough assessment of the banking instability of early 2023. It is well-documented, except for those areas highlighted in this review. The one disappointment is the book does not break new ground by uncovering revelatory government documents, avenues that are being pursued by news outlets such as Bloomberg News and government watchdogs such as Judicial Watch.