The Bank Run of 2023 Could Easily Happen Again - Bill Dudley

 Regulators have yet to address the system’s 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.”

The Fed can require banks to pre-pledge enough collateral (such as securities and consumer and commercial loans) to cover all their runnable liabilities. 

The central bank would be willing to lend against this collateral, ensuring that banks could always obtain the cash they needed to meet depositor withdrawals. 

With an explicit Fed backstop, uninsured depositors would have little incentive to run in the first place.

No last-minute scramble would be required to identify and mobilize collateral to pledge to the discount window.

Bill Dudley Bloomberg 1 april 2024


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