NY Fed, Report: Bank Runs and Information

“The collapse of Silicon Valley Bank (SVB) and Signature Bank (SB) has raised questions about the fragility of the banking system. One striking aspect of these bank failures is how the runs that preceded them reflect risks and trade-offs that bankers and regulators have grappled with for many years. In this post, we highlight how these banks, with their concentrated and uninsured deposit bases, look quite similar to the small rural banks of the 1930s, before the creation of deposit insurance. We argue that, as with those small banks in the early 1930s, managing the information around SVB and SB’s balance sheets is of first-order importance.”

“Given these characteristics, both SVB and SB, like the small rural banks before the creation of the FDIC, should have been acutely aware of the importance of managing the information about their balance sheet. Fortunately, regulators and the banking system at large are aware of the importance of managing the information environment, especially in a crisis. Indeed, policy makers have repeatedly assured the public of the soundness of the banking system, and in a public show of confidence, some of the largest U.S. banks have placed deposits at First Republic Bank, a regional bank facing rumors about its creditworthiness, in a bid to quell a potential run by depositors. Looking ahead, our work emphasizes that banks need to remain aware of, and actively manage, the information about balance sheet risks that is presented to their depositors, especially in times of financial stress. This information includes classic measures on uninsured deposits and losses on asset holdings, as well as newer liquidity-based statistics that have been put into place since the 2008-09 financial crisis.”