Financial stability
Warwick Business School
wbs.ac.uk
The US extended their (industry-funded) deposit guarantee scheme to cover all depositors. And the Swiss authorities did not follow the long-planned international resolution framework for systemically important banks, which was ready to be deployed. Instead, and at the last minute, they organised an emergency rescue by UBS, backstopped by state guarantees. In the US, Silicon Valley Bank (SVB) had a large deposit base from tech firms most of which exceeded their insured deposit limits. The unprecedently large and quick run on the bank was amplified by social media and internet banking. But how did they fail so badly without the US bank supervisors spotting the risks and intervening earlier? Why did the US not follow their pre-set deposit insurance limits?
These episodes have already been the subject of international reports and may well result in changes in future crisis planning. But the challenge is that if the authorities don’t follow their own emergency plans, then markets don’t know how to price in the risks. The financial system will be less effective and less resilient. Credibility of financial policy is hard to win and easy to lose.
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