SVB Failed—and So Did the Feds

On Sunday night, the Treasury, Federal Reserve, and FDIC declared Silicon Valley Bank (SVB) a systemic risk and announced that the federal government would backstop the bank’s customers, allowing them full access to their deposits as of Monday morning. The failure of SVB, which was the 16th largest bank in the U.S., was the first real test of the post-financial crisis regulations put in place under Dodd-Frank to ensure the financial system could withstand the failure of a large bank without spurring contagious bank runs or requiring extraordinary government intervention. 

We flunked the test.

We didn’t have to. 

SVB’s failure was the perfect opportunity for policymakers to reassure financial markets and the public that our financial system is functioning exactly the way that it should. The U.S. economy is better off with a variety of well-capitalized banks of different sizes with diverse strategies, some of which specialize in a given sector, region, or client type. A bank’s strategy being successful is good for its investors and customers. When its strategy is unsuccessful, the bank should fail, its insured depositors made whole immediately, and its uninsured depositors made whole when the bank or the bank’s assets are sold.