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March 10, 2023

Growing Banking Crisis Caused by Contagion from Silicon Valley Bank Failure Going to Get Worse, Inevitable Due to Federal Reserve Policies

WASHINGTON, D.C.— Dennis M. Kelleher, Co-founder, President and CEO, issued the following statement in connection with the failure of Silicon Valley Bank.

“The failure of Silicon Valley Bank (SVB) today is the largest bank failure since the 2008 crisis, and it is going to cause contagion and almost certainly more bank failures.  SVB’s condition deteriorated so quickly that it couldn’t last just five more hours today so that the FDIC could take it over on the weekend for an orderly resolution.  That’s because its depositors were withdrawing their money so fast that the bank was insolvent, and an intraday closure was unavoidable due to a classic bank run.

“The FDIC has all but guaranteed more and quicker runs on the many similarly situated other banks in the US because it is only covering insured depositors.  Recent reports were that more than 93% of SVB’s depositors were not insured.  The FDIC is only giving non-insured depositors an “advance dividend” of unknown amount within the next week and “receivership certificates” for their balances, which likely means they have to get in line with all the bank’s other creditors and hope that at some point in the future they might get some of their money back.  While the FDIC said that future dividend payments “may be made,” it is unknown and will not help with the many uninsured depositors of SVB that have to make payroll and pay other bills today and long before that money, if any, becomes available.  That immediately signals all other uninsured depositors in any bank to immediately run to withdraw their money from their bank.

“This was precipitated by Federal Reserve policies since the 2008 crash (as spelled out in this recent Report), but especially more recently due to the pace and amount of interest rate increases due to the so-called ‘policy pivot.’  Banks simply didn’t have the time to reposition their balance sheets and portfolios.  That resulted in mark to market repricing of numerous assets on banks’ balance sheets and a classic maturity mismatch between assets and liabilities.  Banks can reclassify some of their available for sale (AFS) assets to held to maturity (HTM) and get some bridge support from the FHLB.  However, those actions will be insufficient temporary measures because the yield curve is inverted which is causing depositors to move money out of banks to money market funds and others offering higher rates to savers than the banks, causing depositors to move their money out of banks.

“Ironically, some of that withdrawn depositor money will flow to Wall Street’s too-big-to-fail banks because most believe the Fed will bail them out if they get into trouble.  However, the many banks that are not too-big-to-fail (there are only 7 GSIBs), which are thousands of banks in the U.S., do not have that benefit.  As a result, contagion is coming because the same dynamic that led to SVB’s failure is going to happen at other non- too-big-to-fail banks unless and until regulators intervene.  Of course, that won’t change the yield curve which is the underlying driver and that’s driven by the Fed’s policy of raising rates.

“The Fed’s policies since 2008 have caused instability by decoupling risk from price (as spelled out in this recent Report).  It moved rates to zero (and effective negative real rates at times), lowering risk premia across the entire yield curve.  The result was a historic debt bubble, much of it locked in at very low rates and often for long terms.  The Fed doubled down on this policy when the 2020 pandemic-caused crash hit and then failed to recalibrate and course correct when circumstances changed.  As a result, after two years, the Fed had to precipitously change rates policy (the infamous pivot) from autopilot at zero to 450 basis points increase starting in March 2020 (while simultaneously going from QE to QT).  Given these unprecedented actions happened over just a few months, banks and the financial system had grossly insufficient time to adjust.

“That’s why SVB is just the beginning.  Contagion, likely more bank failures, and various bailouts are almost certainly coming.  While the immediate financial stability threats will materialize or be addressed, the underlying fundamental problems caused in large part by the Fed will remain and likely get worse.  The Fed’s actions to fight increasing inflation will need to be materially adjusted, which it should be anyway because inflation is driven by many factors that are beyond the Fed’s control.  Causing financial instability and a recession (of any depth and length) while missing the mark on inflation should cause a fundamental rethinking of the Fed’s powers, authorities, and role.”


Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit


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