SVB and Signature Rescues Incentive leave for bank runs: Professor Wharton

  • The bailout of Signature and SVB depositors leaves the incentive for bank runs, a Wharton professor has said.
  • Regulators want to treat these banks as special cases, Itamar Drechsler told Insider.
  • “The contagion risk is that there is a rush to other banks that are funded by a large portion of uninsured deposits.”

THE rescue of uninsured depositors at Signature Bank and Silicon Valley Bank still at risk of further bank runs, according to Itamar Drechsler, professor of finance at Wharton.

While Sunday’s intervention may have mitigated some damage, the potential for further downside remains, he told Insider.

“An obvious problem is that the plan treats the two banks, SVB and Signature, as a special case, in the hope that it won’t have to be done for many other banks,” Drechsler said. “But that then leaves the incentive for uninsured depositors at other banks to run.”

He added that deposits in the form of business checking accounts or cash that the bank has used to buy long-term, fixed-rate assets such as mortgage-backed securities are particularly at risk.

This is how the collapse of SVB began. Last week, the bank reported a $1.8 billion loss on the sale of a portfolio of bonds to help cover increased deposit withdrawals, triggering a run on the bank.

“The contagion risk is that there is a rush to other banks that are funded by a large portion of uninsured deposits,” Drechsler said. “Many of these accounts didn’t think there was a problem to worry about before the news about SVB and the other banks that went bankrupt, but now they have a reason to worry and withdraw their deposits and switch to other banks.”

Some commentators, including Senator Bernie Sanderspointed to Trump-era Dodd-Frank reversals as the reason for bank failures.

Changes in 2018 exempted regional banks like SVB from stricter regulatory standards adopted after the Great Financial Crisis.

Barney Frank, who co-wrote the original bill and helped oversee Signature Bank, doesn’t blame Trump’s policy changes, however.

The justification for the bill is that no one is talking about something like 2008“Frank said, according to Bloomberg. “If the bill hadn’t passed, we would be seeing a lot more damage these days. We have eliminated a large part of the vulnerability of the system.”

Editor’s Note: Title has been changed to reflect the view that the new federal deposit safety nets are keeping incentives for bank runs in place, not creating them.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top