The financial sector was shaken last year when the collapse of Silicon Valley Bank (SVB) triggered a series of bank runs at 22 US lenders, as reported by the New York Federal Reserve. Depositors hurried to withdraw their funds from these banks on March 10th and March 13th, 2023, resulting in some institutions losing up to 10% of their assets in a single day.
Interestingly, it was revealed that the bank runs were mainly instigated by large institutional depositors rather than retail customers. A few substantial payments exiting the affected banks caused a ripple effect throughout the financial system. Publicly traded banks seemed to bear the brunt of the turmoil, indicating that market information such as stock prices and market capitalization played a significant role in depositor behavior.
The report highlighted that the outflows from the distressed banks were concentrated following the FDIC’s announcement of SVB’s failure, hinting at information spillovers influencing the rush to withdraw funds. Notably, running depositors tended to flock towards the largest banks with assets exceeding $250 billion, particularly on Friday, March 10th.
To stem the outflows, the 22 lenders resorted to heavy borrowing rather than selling off securities. Many turned to sources like the Federal Home Loan Banks (FHLBs), the Federal Reserve’s discount window, and the Bank Term Funding Program for financial assistance. Additionally, some banks opted to increase their deposit rates to attract new deposits, ultimately allowing them to recover from the losses by mid-2023, albeit at the expense of higher interest expenses.
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As we navigate through the complexities of the financial world, it is essential to stay informed and adapt to changing circumstances. The repercussions of the SVB collapse and subsequent bank runs serve as a stark reminder of the fragility of the banking system and the importance of sound financial practices.