SVB: Government response will avoid collapse, says economist – 03/15/2023 – Market

SVB: Government response will avoid collapse, says economist – 03/15/2023 – Market


The response of the US President Joe Biden’s government to insure all deposits at the Silicon Valley Bank (SVB) will prevent the bank’s failure from being the trigger for a systemic financial crisis, argues economist Justin Wolfers, a professor at the University of Michigan .

Doctor in economics from Harvard, Wolfers claims that the collapse occurred due to the relaxation that Donald Trump made in 2018 of the policies implemented after the 2008 crisis, and defends the increase in regulation of the sector.

A 2010 law placed banks under the supervision of a Financial Stability Oversight Board (FSOC), with the function of identifying risks that may affect the market, and created a Consumer Financial Protection Agency (CFPB) to oversee the credit sector. individuals, among other measures to increase transparency.

In 2018, Trump signed a law that released medium-sized banks from the stricter rules established in 2010. With the easing, only banks with more than US$ 250 billion in assets were subject to federal supervision —which at the time restricted the universe of institutions less than ten. Before, the rule was lower, US$ 50 billion.

Is the SVB bankruptcy the trigger for a systemic financial crisis? No. In theory, if the federal government had done nothing, a crisis could have spread. But the federal government’s response was to guarantee all deposits. Implicitly, it’s a promise that if another bank fails, depositors will get a full refund. This completely changes the likelihood of new bankruptcies.

Bank runs happen when there is concern that the bank will not have the money to pay deposits, so they try to clear accounts while there is still money in the vaults. If you know you’re going to get your money no matter what anyone else does, you don’t have to run to the bank anymore, and the banks don’t talk. It’s a very strong response from the federal government that removes the incentive for other depositors to withdraw their funds even from troubled banks. There was great concern, but markets are already recovering and the picture is clearer.

Economists have been talking about a recession in the US since last year. Are we closer to that? Not a lot. Silicon Valley Bank is a bank that serves only one sector of the economy, technology. It is a small sector, predominant in only one part of the country. And everyone secured their money. If you think about most people in the economy, how different their lives are today than they were last Friday. [quando o banco faliu]? The answer is, not much. If I own a factory in Ohio, I’m going to make as many cars today as I did last week. And if I own a sandwich shop in Maryland, I’m going to try to sell the same number of sandwiches. This is largely due to the government’s response.

Data show that inflation remains resilient. The data does not reflect what happened to the SVB, but it does show two things true: inflation is still an ongoing problem and it is slowly improving. A recession does not happen when inflation is high or low, rising or falling, but when we are producing less, buying less, with fewer jobs. The data so far suggest that the economy is growing well. The number of jobs created last month was extremely high, which doesn’t sound like an economy close to a recession.

Are small and medium banks also safe? Many small banks are less secure because they are always less secure. But most of us don’t have deposits above $250k [limite assegurado por fundo garantidor de crédito nos EUA]. At SVP, most of their clients had large amounts of money, and 97% of their deposits were above that amount. This means that the SVB was much more exposed.

When you think about who is at risk, I wouldn’t necessarily say the criteria is small or regional, most deposits at your bank are fully insured. There was great concern about regional banks on Monday, but most of them have already seen a strong recovery and it looks like they are not really at risk. And even if they were at risk, they form a very small part of the economy. So it won’t be a big macroeconomic consequence.

Will there be an impact on interest rate increases? The SVB gambled that interest rates would remain low, and they were wrong. When they lost the bet, instead of admitting that they lost, they continued with the investments or doubled the bets, let the losses increase. And you might say “it’s terrible that these banks can make such big bets and then the federal government has to step in”, and I agree with that. This was made possible because of the weakening of banking regulation that took place in 2018 and therefore the big banks would not be allowed to take risks like the SVB did. It’s crazy the idea of ​​letting these midsize banks do these things especially when the federal government has to clean up the mess.

The Trump administration loosened regulations imposed after the 2008 crisis. Is the answer now to tighten the rules? I’m pretty confident that we’re going to see some sort of regulatory action in that direction. The SVB literally couldn’t make these investments if it weren’t for the 2018 deregulation. The broader issue is if we, the taxpayers, are going to afford insurance for the banks, we have to make sure they can’t make these trades which basically are: dude , win, crown, government cleans up the mess. We have to stop them from playing with it if we are the ones to bear the losses. That is why there is a need for greater regulation of bank investments, their size, risk and the ease of liquidating them.


justin wolfers
Professor of public policy and economics at the University of Michigan, he holds a PhD in economics from Harvard. He writes for The New York Times and is a senior fellow at the Brookings and Peterson Institute for International Economics think tanks.



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