The Bank Run of 2023 Could Easily Happen Again

Ever since the demise of Silicon Valley Bank in March 2023, regulators have been focused primarily on increasing loss-absorbing capital at the largest US financial institutions. Much less attention has been paid to the problem that precipitated last spring’s banking crisis: banks’ vulnerability to sudden depositor withdrawals.

The SVB debacle exposed three weaknesses. First, depositors pulled their money much faster than assumed by requirements such as the liquidity coverage ratio, intended to ensure that banks have enough cash and easy-to-sell assets to survive 30 days of withdrawals. Second, the Federal Reserve couldn’t provide sufficient emergency discount-window loans, because banks hadn’t pledged enough collateral to the Fed. Third, uninsured depositors had ample reason to run, because they couldn’t be sure the government would make them whole: Such bailouts can happen only after a bank fails and regulators judge that the situation is bad enough to invoke the “systemic risk exception.”