In March 2023, the global banking landscape was shaken by a crisis that had ripple effects felt across the world. Over five days, three U.S. banks failed, sparking a sharp decline in global bank stock prices and necessitating a swift response by regulators to prevent a possible global contagion. This is the story of how the crisis unfolded and the measures that were taken in response.
A Sequence of Events
The crisis began with the failure of three mid-sized U.S. banks: Silvergate Bank, Signature Bank, and Silicon Valley Bank (SVB). Both Silvergate and Signature Bank had significant exposure to the volatile cryptocurrency market, which turned out to be a major factor in their downfall.
SVB, on the other hand, faced a different set of challenges. The bank had shifted its portfolio to longer-maturity bonds, which lost substantial value when market interest rates rose. The situation was exacerbated when SVB sold its Treasury bond portfolio at a considerable loss, triggering concerns about the bank's liquidity and leading to a bank run. The bank's clientele, primarily technology companies and wealthy individuals with large deposits, faced a moment of crisis when they found out that balances exceeding $250,000 were not insured by the Federal Deposit Insurance Corporation (FDIC).
Response by Regulators
In the wake of these bank failures, major U.S. federal bank regulators announced that extraordinary measures would be taken to protect the deposits at Silicon Valley Bank and Signature Bank. The Federal Reserve, in particular, set up a Bank Term Funding Program (BTFP) to offer loans of up to one year to eligible depository institutions, as long as they could pledge qualifying assets as collateral.
Global Intervention
To prevent the crisis from affecting more banks and spreading globally, industry regulators from around the world, including the Federal Reserve, the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank, stepped in to provide extraordinary liquidity.
The crisis also saw a notable intervention from Switzerland. In a government-brokered deal, Credit Suisse was acquired by rival UBS, a move seen as a way to prevent Credit Suisse, a systemically important financial institution, from collapsing and causing further damage to the banking system. This move received praise for its swift and strategic approach to halting the banking crisis.
Crisis Escalation
By March 16, large interbank flows of funds were underway to shore up bank balance sheets. As a result, the Federal Reserve's discount window liquidity facility saw approximately $150 billion in borrowing from various banks. Analysts began to talk about a potential broader U.S. banking crisis.
The Case of First Republic Bank
The crisis was not contained to the initial three banks. First Republic Bank (FRB), based in San Francisco, saw a rapid withdrawal of cash by its depositors, many of whom were wealthy individuals with uninsured deposits exceeding $250,000. Despite a $30 billion capital infusion from a group of major banks in March, FRB continued to destabilize, and its stock price plummeted. By the end of April, the FDIC was preparing to take it into receivership and find a buyer.
Looking Ahead
The 2023 banking crisis serves as a stark reminder of the risks inherent in the global banking system. It highlights the importance of effective regulation, swift response in times of crisis, and the need for individual institutions to manage their risks effectively. As we move forward, lessons from this crisis will undoubtedly shape the future of banking, guiding policies and actions that aim to prevent a similar occurrence in the future.
