Weekly Business Insights from Top Ten Business Magazines | Week 287 | Shaping Section

Extractive summaries of and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 287 | March 10-16, 2023

Shaping Section : Ideas and forces shaping economies and industries

Top Obama economist has a 3-point plan to fix banking and says ‘no one should feel good about what happened here’

By Tristan Bove | Fortune Magazine | March 13, 2023

Listen to the Extractive Summary of the Article

The economic environment’s abrupt departure from zero-interest rates in the past year might mean that a collapse in the risk-filled banking sector was always likely, but almost nobody was expecting this, not even the regulators. Silicon Valley Bank became the second-largest bank failure in U.S. history after the largest-ever bank run, and while it insisted it was solvent right up to the very end, it just wasn’t prepared for the surge in withdrawals. The bank had reinvested many of its assets into risky long-term bonds that lost value as the Fed hiked interest rates, meaning that as the tech sector freaked out about the solvency of its favorite bank, it didn’t have the cash on hand to pay them. 

But with debates still raging over who and what was responsible for the crisis and if the government should step in to fix it, some things are becoming clear: Small and regional banks like SVB may not be as different from Wall Street behemoths as they’d like us to think, and banking regulation was revealed to be no match for a skittish group of tech executives.

Jason Furman, a Harvard economist who held senior positions in two economic councils advising the president during the Obama administration outlined a three-point plan of next steps to stop it from happening again, largely focused on expanding regulators’ reach to keep all banks—even the small and regional ones who only years ago declared themselves innocuous to the financial system—in check.

Furman outlined his three-point idea to understand what caused SVB’s failure and how to prevent future ones. The first step investigators need to take is to “find out what went wrong with regulation,” and how such a large systemic risk could have developed overnight. Secondly, existing regulation needs to be strengthened, Furman wrote, and expanded to cover smaller banks in addition to Wall Street giants. Furman’s third point had less to do with regulation and more with what banks themselves could do to guard against a bank run. “Increase deposit insurance—and make everyone pay for it in advance,” he wrote. 

3 key takeaways from the article

1. The economic environment’s abrupt departure from zero-interest rates in the past year might mean that a collapse in the risk-filled banking sector was always likely, but almost nobody was expecting the collaps of Silicon Valley Bank, not even the regulators.
2. SVB became the second-largest bank failure in U.S. history.
3. Jason Furman, a Harvard economist outlined his three-point idea to understand what caused SVB’s failure and how to prevent future ones. The first step investigators need to take is to “find out what went wrong with regulation,” and how such a large systemic risk could have developed overnight. Secondly, existing regulation needs to be strengthened and expanded to cover smaller banks in addition to Wall Street giants. Third, increase deposit insurance—and make everyone pay for it in advance. 

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Topics:  Finance, Banking, Inflation