Lessons From SVB Have Echoes of a 1980s Bank Collapse

The bust of Silicon Valley Bank is the clearest demonstration that monetary policy indeed acts with long and variable lags. Risk assessment now has to include not just contagion to other banks, but also an understanding that higher rates have damaged balance sheets more than we thought. This has strong echoes of the early 1980s.

Long and variable lags. That’s it exactly, isn’t it? It’s been a year since the Federal Reserve embarked on its most aggressive monetary policy tightening in decades, and the abrupt collapse of Silicon Valley Bank changes everything. Suddenly the focus is more on financial stability than inflation. From my vantage point, the odds of a recession in 2023 have increased as investors pull back from bank stocks. As a result, regional and small banks are likely to raise credit standards and restrict credit availability so they don’t become targets, too.