The Failure of Silicon Valley Bank: Everything You Need to Know about Banking and Bailouts

Hello my name is Andrew metric and I'm a professor of Finance at the Yale School of Management and the director of the Yale program on financial stability we're now sitting here towards the end of March 2023. and earlier this month Silicon Valley Bank a bank with 200 billion plus in assets failed and needed to be taken over by the FDIC in the United States Today I'm going to discuss the failure of Silicon Valley Bank it's a very instructive case and tells everything you need to know about Banking and bailouts can help us to understand Financial

crises of the past and really get a toll hold even on understanding the big one the global financial crisis of 2007 to 2009. to make sense of the module that I'm about to do you really just need to know two things first what a balance sheet For a business is a balance sheet has three main components assets on one side liabilities and shareholder equity on the other if you have some rudimentary understanding of what a balance sheet is you'll need that to understand what I do in the next hour or so second you need a

basic understanding of interest rates what an interest rate is and how the Federal Reserve plays a role in the setting of interest rates in the United States with those two foundational things I hope you will be able to not only follow what I do in the next hour but also learn a lot about Banking and bailouts from the very instructive failure of Silicon Valley Bank as it happens I've spent a lot of the last 15 years teaching and writing and thinking about the global financial crisis I have an online course available through Coursera which is

free that is Co-taught with Tim Geithner who is in government at the time of the crisis about the global financial crisis turns out that it's really difficult to explain what went on during the global financial crisis there's a lot of different steps it's not just a bank failing but rather different pieces of the financial system failing and it's been a challenge and I would say that over the last 15 years Our Collective understanding while it's moved a lot in the economics profession maybe we haven't done a great job of explaining it to the world Silicon

Valley Bank perhaps is my opportunity to make amends for that Silicon Valley Bank is a classic example of a bank run it has the elements of banking crises that we've had since as long as we've had banking very straightforward and what I hope to do today in just one module is explain What went on in fact I'm hoping to answer four questions the first is what actually happened and was the thing that happened just some form of mass Hysteria that's big question number one the second question is why did the government do what it did

why did it take the steps that it took and not take other steps third what we see after we answer one And two is the banking system seems a little weird a little magical why do we organize it that way might there be a much simpler way to organize it and then finally what is it that we should do to best prevent these things from happening and is it possible to completely prevent them after you've watched this lecture I hope that you are sufficiently inspired that you want to go and understand what was a massive

financial crisis 15 years ago And with the background and the straightforward way that Silicon Valley Bank failed and helps us to understand the banking system and bailouts of the banking system you will be ready to really understand the grandmother of all crises the global financial crisis so that's our goal here and got a set of I hope short units Each of which will take us through the steps necessary to answer these four big questions Um going through the entire thing will be the theme of the balance sheet of the bank because the balance sheet of

the bank is actually where their Factory floor is where their entire business is really happening [Music] may be familiar with balance sheets for for regular businesses we have two sides to the balance sheet on the left side is the asset side of the balance sheet and On the right side is liabilities and equity and the idea of looking at a balance sheet for any business is to get an understanding for here's everything they have and here's everything they owe and that has been invested and for banks it's a particularly straightforward thing what you see in

front of you now is the balance sheet for Silicon Valley Bank on December 31st 2022 this is an officially Audited balance sheet the accountants have been through it and you can see that on the asset side of the balance sheet they have 14 billion dollars of cash they have 120 billion dollars of Securities things like bonds they have 74 billion dollars of loans these are loans that they have made to other companies so even though it's a loan for that company it's an asset for Silicon Valley Bank because they need to Be they will be

paid back and they have four billion of other Assets in total at the end of 2022 they have 212 billion dollars of assets how do they pay for those 212 billion dollars of assets well that's the other side of the balance sheet their liabilities are in three pieces by far the largest piece of those liabilities are deposits so if you are a depositor in a bank you think of it as your money but what You've really done is made a loan to the bank so when you give money to the bank it's your deposit they

promise to pay you some amount of interest and you can take it out whenever you want that's a loan that the depositor has made to the bank so it is a liability of the bank the vast majority of the funding that they have to buy the 212 billion dollars of assets comes from deposits that people have put in their Bank we have 173 billion of those They also have 5 billion of long-term debt as a a bond where they will be paying it back over time that is uh longer than one year have 19 billion

of other debt mostly short-term debt that they're paying back to to various Federal entities the total amount of liabilities is 197 billion the difference between how much they owe and the accounting value of what their assets are worth is 15 billion and that's called their Equity okay so sometimes we think about uh uh from the perspective of an investor investing in these things that the equity is in the form of stock uh and the the liabilities are often have a lot of bonds in them here most of the liabilities are deposits some of the equity

is stock but that stock is owned by a kind of a big holding company sitting on top what you can see on this balance sheet in the upper right corner is two little Things net interest income and net interest margin net interest income is representing here you see it's 5 billion that's the total amount they are earning on their assets minus how much they have to pay on their liabilities net interest margin of 2.2 percent tells you what percentage that is of the overall base net interest margin of 5 billion dollars that's pretty much their

whole business They borrow deposits long-term debt other debt they have investors who have given them some equity and then they go out and buy assets and they make their money just by having their assets earn more than they're a lot then they have to pay out in their liabilities much simpler even than a business that cuts your hair and charges you for the haircut and has to pay rent and labor and all these other things here we can read it all from the Balance sheet but to understand what happened to Silicon Valley Bank we have

to do we have to drill a little bit deeper into exactly where that net interest margin comes from so this is where we start with 212 billion dollars of assets and 212 billion dollars of liabilities plus equity the story of what happened to them which started around this time at the end of 2022 And lasted for the next two months and change until ultimately Silicon Valley Bank needed to be rescued in a form and resolved by the FDIC in the United States was that depositors this 173 billion that they had at the end of 2022

started asking for their money back and you would wonder well why why would that be because the Assets in their balance sheet on this side the accounting is 212 billion dollars worth Of assets that's way more than 173 billion of deposits there's plenty of money there depositors shouldn't be worried if they just count on the accounting value but furthermore even if we just do common sense values cash is cash that's 14 billion the Securities that they had 120 billion dollars worth of Securities are very very are largely very very safe things a lot of them

are liabilities of the US government which is as safe as it Can get uh from the perspective of of uh putting it on your balance sheet uh they have 74 billion in loans but nobody was saying that they thought those loans weren't going to get paid back that's a way that Banks often get in trouble is they make loans if you can think about the mortgages that were written in uh leading up to the global financial crisis in 2008 they'll make loans we think oh these aren't really good loans they're not going to pay back

And that would be a reason to worry maybe that 74 billion isn't really worth 74 billion but there was no significant questions at this time about these loans not paying back most people thought those Securities if they hold them for the entire time that the Securities are out there they'll end up paying back the 120 billion of face value they have and same with the loans so there was really not a question either from a common sense perspective Or an accounting perspective of why the depositors would feel the need to run to take their money

out because they were nervous about the bank why would they be nervous to understand what happened to Silicon Valley Bank in March of 2023 all we need to go back a couple of years and understand how it grew since before covid that will be helpful for setting the stage that we can then look carefully at their business model and See how these different pieces fit together what we have on the screen now is the 2022 balance sheet and the key things look at some of the the big numbers on this sheet they had 120 billion

of Securities they had 74 billion of loans they had 173 billion of deposits these are the big numbers that are on there let's take a look at how that changed over the previous three years This is just a picture of uh four useful items from the balance sheet Securities loans deposits and and equity in blue is where those stood at the end of 2019. and in Orange is where they stood at the end of 2022. you can see this is really massive growth deposits went from 62 billion to 173 billion so they had a hundred

and eleven billion more dollars that they had to figure out What to do with there another 9 billion from equity most of the dollars that that came in ended up going into securities so 91 billion went into Securities whereas only 41 billion went into new loans to businesses so not really that surprising let's think of what was happening in uh from the end of 2019 until the end of 2022 is that once covid hit there was a lot of stimulus in the economy coming both from Government handing out money to to people into businesses where

they thought they needed it and from the Federal Reserve that was pushing interest rates lower more on that coming basically there was a lot of liquidity and in particular the area of the country that Silicon Valley Bank served uh was also seeing a boom in investment during some of this period so many of their clients predominantly their largest clients being Tech firms uh and Uh Venture capitalists who invest in them and the people who are the the often wealthy people who work at those places uh were particularly were particularly highly liquid moment and they took

a lot of that money and put it in their Bank but it's hard to get those 100 and it's hard to get 111 billion dollars of deposits out the door into new loans all that fast so for some of it they just bought Securities and mostly they bought Securities that were extremely safe but that's a very important backdrop to recognize here this is not a bank that was uh just moving along in a nice steady in a nice steady way this is a bank that grew very fast and indeed for the people who watch over

banks for The Regulators for the supervisors they often view very rapid growth of a bank as one thing to immediately go and look more carefully about but it is important to note that there Is no statement here that they went off and bought assets that people thought were Bad Assets there's no sense in what they got here with something like subprime mortgages or loans that were extremely risky to uh for for Enterprises that might fail quickly no most of what they did is in this column going from 29 to 120 billion where they bought safe

government securities so how can we get in trouble doing that Now let's move all the way back to 2019 and take a look at the balance sheet that's there in 2019. what we see here is the the numbers from the previous picture they're much smaller than the numbers that we saw from 2022 the total amount of assets is 71 billion the total amount of liabilities in equity is 71 billion they always have to add up on both sides and if you look in the top right corner you see that the net interest income at This

point was only 2 billion so significantly lower this seems like a much more profitable Enterprise in 2022 when this was 5 billion than it does here at 2 billion but of course the asset base had gone had gone up considerably between 2019 and 2022 so perhaps it's not that surprising that they're earning more net interest income but where is that coming from said that the whole business of banking is to make more on your assets then you have to pay Out in your liabilities and equity and there's three components that go into that so we're

going to do now is unpack those three components and once you understand what those three components are where they come from it's easier to see how Silicon Valley Bank got in trouble okay other than balance sheets the one other very important picture for us to look at is yield curves what we see on this chart is a basic Yield curve for the United States government at year at the year end of 2019. on the y-axis is the rate that is being paid in percent and on the x-axis is time the time is not drawn to

scale I'm in a standard way we like to break up the early years going from one month to three years into much smaller pieces and then really spread it out all the way up to 30 years this gives you a sense of what it costs The United States government to borrow at all of these different time Horizons the yield curve is a fundamental for understanding what's going on in any Financial business and usually the yield curve has an upward slope like the one that you see here so this is the actual yield curve from the

end of 2019. on the left side you can see that for one month if the government is borrowing for 30 days which is something that it does often It would have to pay about 1.5 percent we also say 150 basis points is approximately 150 basis points with the other end if the government borrowing for 30 years it was closer to two and a half percent or 2.4 percent to be more precise so the difference between what would cost the government to borrow short term and what it would cost for them to borrow long term here's

almost a full percentage point I'm going to put in a Dotted line here just so we can see that difference you we would call that the term spread so in general if you just go back through all of history and you're always borrowing for example at a very short end and paying the interest rate of a 30-day interest rate but lending at a long end uh and getting paid that you're usually going to just earn returns from that by itself now there's a big debate about why that is and it's not always true but it

was Important to note that it is usually true and it is usually a reason that Banks can make some money because if you think about a type of loan a bank would often do think of a mortgage loan uh which will go for 30 years the average payment won't be 30 years long but it's a third thirty year uh a a 30-year transaction and that will typically just have a higher rate than a a similar type of than a similar type of loan that would Be very very short term and so since they're usually getting

most of their liabilities short term and a lot of their assets take a while to mature they're typically picking up a term spread so one piece of this net interest margin is just the difference between that you get in general from borrowing short and lending long a second piece though comes from the fact that some of the loans in 2019 at the time That were drawing these pictures half of their assets were coming from from loans that they wrote not Securities not government yield curve but something a little riskier lending to the government is still

thankfully considered to be essentially risk-free but when you're lending to a business it's not risk-free when we think about a typical the typical Bank business the typical things that they're doing we're often thinking about them finding good Investments good Businesses to to loan money to a restaurant would be an example or in Silicon Valley you might be lending to some sort of tech firm uh often you're going to have some collateral maybe very good collateral but you're still going to have some risk and because of that risk the red line here the risky loan curve

line will typically look like a risk-free line in blue with some extra peace on it here's the piece we call that the credit Spread in this example I've just given an educated guess that this is a 150 basis points 1.5 percent higher than the risk-free line the exact number doesn't matter for the discussion that we're going to have but it is higher now keep in mind you only get that if the investment pays back so this is not the same thing as saying they're expecting to get that whole credit spread but if they're brilliant brilliant

lenders and they know exactly With perfect foresight who can pay back and not and they're able to capture this difference then they're always going to get paid back and they'll always earn that credit spread Banks often get in trouble when they make mistakes in that and even though they're hoping to get the red line they might end up getting zero but if they're getting the red line then they get this additional piece the third thing that makes up the Difference between what banks have to pay for their liabilities and what they get in their assets

is the fact as we saw most of their liabilities are in the form of deposits the yellow circle that's the actual average amount that Silicon Valley Bank was paying on its deposits at the end of 2019. half a percentage Point 50 basis points in fact two-thirds of the deposits at Silicon Valley Bank at the end of 2019 were Paying zero you might ask well why would people be willing to accept zero well it's actually not that hard to understand let's keep going and then talk about why that might happen so I've extended out the dotted

line here in the deposits extended it out from the circle the circle is very very close to the y-axis because generally with deposits you go take them out anytime you want there's No term on them I'm extending out the dotted line because what makes a bank really happy often to have deposits is that even though people can take them out anytime they want they usually don't they usually take out what they need for whatever their transactions are and leave a fair amount of money in the case of Silicon Valley Bank well north of 100 billion

dollars in Their deposits earning lower amounts even though they don't necessarily need it every single day the reason for that is that deposits or have a what we call a convenience yield when you put a deposit in a bank it's not the same thing as having a Government Bond we like to think it's just as safe but it can do things that a Government Bond can't do you can for example pay for your lunch with it and pay your bills at the end of the month Take for example a corporation imagine a corporation had a

million dollars sitting in Silicon Valley Bank and they were using that for their regular payroll so money would come in money would come out on average there was a million dollars that was sitting in there and let's say that they were the average Silicon Valley Bank customer and they were receiving 50 basis points on their deposits that's a whole one percent less And these are the real numbers than the government had to pay at that time what would the business be receiving for that 100 basis points well they would be getting they had their money

it was available they could do their payroll out of that they could do any of the regular expenses that they had out of that one million dollars what was it costing them to leave it in the bank instead of say running down the street and calling their broker because they're A big company they have a million dollars sitting in their bank account they could call their broker and they could buy a government t-bill that would pay them a whole percentage more what was it costing them during that year to leave it in the bank and

earn only 50 basis points it was costing them that one percent on the one million dollars that's ten thousand dollars a year so let's ask is the convenience of having a place that could easily do this Worth ten thousand dollars a year to a business that has that kind of flow and that kind of doesn't seem like an unreasonable number so it's a service the bank provides it's one of the ways they get paid when we look at this whole picture and we add up those ways they get they get paid we see these three

elements they're paying they're paying out a deposit rate which is pretty low but they're providing the service of convenience they're receiving The term spread because a lot of the loans and also the Securities they buy are longer term than the very short end of the Curve and if they're smart investors they're also capturing the credit spread if they do their job well that whole thing will ultimately represent their net interest margin with that starting point of seeing where it is that the bank is making money now we can see what happened between 2019 and 2022.

these are the actual lines Well the blue and the yellow are actual lines and the red is a reasonable gas of of where they were going to earning their money as of the end of 2019. what then happened well we have covet hey and with kovid which first hits Us in March of 2020 over the course of 2020 the Federal Reserve kept pushing down their target for interest rates so by the time we get to the end of 2020 December 31st 2020 the green line shows us what the Government yield curve is so up to

one year it's basically just sitting right there at zero you know they're paying essentially nothing government is paying essentially nothing to borrow interest rates have been pushed down so low and uh even if we go all the way out to 30 years we're still only a little bit higher uh than what the government had to pay on one month things three years before The yield curve is still upward sloping indeed it's got a little more of a slope than it used to have but it's significantly lower than it was in 2019 in just one year

remember it's during this year a lot of money is starting to pour in this year and the next year a lot of money is starting to pour in uh uh to Silicon Valley Bank and what are they doing with it okay well they're going to take a lot of this And you might think well why don't they just put it in the safest thing that they can which is also very short that's a tough business now to be in they're still paying something that's going to look a little bit higher than zero the yellow dot

would be moving around here too but they're still paying something looks a little higher than zero if they put it in the very shortest government things they're just going to earn no money at all So they think well until we can get this into loans let's at least go further out on the curve and get something it's government securities that we're investing in those will be a little bit safe uh or a lot safe and so for a lot of what they did they purchased either government direct US Government liabilities or things related to guaranteed

mortgages from the government but again things that nobody thought then and nobody Thinks today are in danger of not paying back a lot of the new money went into that Now by early 2022 it was clear to everybody that we had an inflation problem in the United States not just in the United States and that the main way that you can push back on those types of inflation problems is for the Federal Reserve to try to slow down the economy by pushing interest rates up Standard medicine for what we do uh if we think that

there is an inflation problem that's the Playbook and while there's debates about whether the FED should have started earlier or gone slower or faster what's important to us for understanding Silicon Valley Silicon Valley Bank is what things look like by the end of 2022 let's do that that's in Orange couple things to note about difference Between orange and green and they're both very easy to read with the eye the first is it's a lot higher okay so short rates the shortest end of the curve around one month government T builds is already above four percent

and indeed uh it's a little bit higher than the 30 year so the second piece is that second thing that's that that we can read by looking at it is if you look at the shape of the line It's now basically flat or in fact a little bit downward sloping from the beginning to the end if you go all the way from the beginning to the end that shape difference will also matter so this change if you think of what happened a lot of money came in through deposits and they were pretty much stuck with

being somewhere on the green line for That and then by the end of 2022 suddenly the world was on the Orange Line note that the orange line is considerably is is above everything all the 2019 lines including the risky ones that means that the government the U.S government if it wanted to borrow for 30 days had to pay a higher interest rate than probably Silicon Valley Bank could be expecting to earn on any of the assets that they had Okay so we have a whole bunch of assets out there summer loan summer Securities but if

they had bought them a while ago and put them in place a while ago because it takes a while for long-term things to mature they should generally be expecting to pay more if they were the government for example they were expecting to pay more on that than what they would be getting in those assets that's one fundamental Challenge and it is not unique to Silicon Valley Bank This happened all across the country we're going to be talking about Silicon Valley Bank specifically because we have a lot of information about it and we know they failed

but this same Dynamic is playing out to various you know High more or less degree at every Bank in the United States okay we've just looked at this picture about what happened to the yield curve now let's go back to our other favorite picture The balance sheet okay so here is our balance sheet this is what we started with this is where we stand on December 31st 2022 okay if we recall we have the asset side with a total of 212 billion and the liability liabilities of 197 billion and 15 billion of equity or cushion

that we have such that if we sold all the assets and got 212 billion and paid back all the liabilities we'd have 15 billion left Over but we've also discussed what has just happened in the yield curve world and one thing that that does and this is a sort of a quite important uh uh it's a little piece of math but not a big piece of math is what that does is your securities portfolio if you're already holding a bond and that bond is promising to pay you one percent per year and suddenly Interest rates

go up so that now people can go and buy a bond that pays them four percent per year your bond is relatively less valuable now if someone can just go out and pay a hundred dollars and receive a bond that will give them four dollars a year for a long time and you're sitting holding a bond that pays you that you paid originally a hundred dollars for but it only pays you one dollar a year No One's Gonna Give You a hundred Dollars for that Bond right they'd much rather spend their hundred dollars on something

paying four percent and the math behind this is pretty straightforward but the direct the direction is really clear which is if you own things even things that are super safe didn't say anything in the in that last paragraph about not being sure if you were going to get your dollar a year or your four dollars a year we're sure about it it's just that hey when Interest rates are higher I'd rather put my money in some new thing with a higher interest rate than an old thing with a lower interest rate that tends to drive

the value of that down so how would that be reflected in Silicon Valley's balance sheet now is where we start enter we start leaving the incredibly obvious and this makes a lot of sense world to a world of where it seems a little bit mysterious and magical hey and in fact that is banking What we're going to do now in red is I am going to Mark to market the value of the Securities that is they have 120 billion dollars worth of security so if we imagine what is that one way to think about that

from an accounting perspective or even a common sense perspective is that if they held on to those things forever they will eventually pay them back you know they're going to get all their money back by the end of 120 Billion dollars they're all face value that's one way to think about it but because we know that the interest that those things are paying is a little bit lower uh or in some maybe a couple percentage points lower than what someone else could get on a different Bond if you actually tried to go to the market

take that 120 billion dollars of face value of bonds and sell them you would get 103 billion for this take that as just Truth for now and I'll Explain where we get it from in a minute but imagine that that's actually true that the 120 billion dollars that you would get if you just held on to it because it's government government promised to pay you 120 billion dollars but not for a while uh but if you held on to it you get it but if you tried to get it today if you needed it today

you would get 103 billion for it what does that mean now what kind of other adjustments would we Make to the balance sheet first recognize we're already doing something a little bit funny because when we wrote the balance sheet we were following certain types of rules those are the rules that the accountants tell us you have to follow and in those rules we were just writing things down at the at the value that we thought they would ultimately give us that's why we had the 120 billion now I'm doing something a bit different Which is

saying well I actually can see this thing has a market price I can see what it would be if I sold it today maybe I shouldn't just write 120 billion down maybe I should write 103 billion down and so if we do that what does that do to the rest of the balance sheet well you now have 17 billion Less in assets what does that mean well where's that come out on the other side it doesn't change the liabilities at all so if I Was actually going to Mark to Market where that happens on the

balance sheet it would change the equity both sides always need to add so the equity goes from 15 billion to minus 2 billion the totals on both sides still balance at 195 billion okay so the important Point here really just the and using red helps us to see that because red tells us we're in the red uh is that now if you were to just say here's the mark to market value of These securities then you would also say well seems to me if I just had to roll this whole thing up tomorrow sell all

the assets and pay back all the liabilities I don't have enough money to pay back all the liabilities so that's a starting point and that's always a starting point for why Banks end up getting into trouble in this particular case these numbers were known It's not as though we had an army of smart people digging through the records to figure out what this is or it only became clear after they failed this was disclosed at the end of 2022 this was disclosed and it was in their filings and everybody could see it so that's sort

of weird too if everybody could see this at the end of December 2022 and they Were at least willing to keep their money in why suddenly in March did they decide they need to take their money out and again this kind of pulls us back a little bit to the the fiction of the way the way that banking works which is while they had to disclose that actually their Securities would be worth less if they sold them the accounting the formal accounting thing that they say when they say here's How much Equity you have we

have they're still allowed to say 15 billion and it's not completely crazy it's based on the following way of thinking about a bank which is hey those deposits are sticky they're not going to leave and if the deposits don't leave uh then we don't have to sell the Securities and we don't have to liquidate the loans and if we don't have to liquidate the loans then we don't have to sell the Securities They're still gonna ultimately give us 120 and for the Securities and 74 for the loans and we're still completely solvent so this word

solvent you'll start to hear a lot that basically is just is my amount of equity positive are my assets worth more than my liabilities back when we were talking about this as a pure accounting world just in Orange they were solvent they are accounting solvent here and indeed That is what they reported even though also if you looked at their you could see they would say oh and by the way if we Mark these to Market they'll be down so if we do a partial Mark to Market then they wouldn't be solvent but it's a

partial one so what's now going to make the deposit holders decide that they're scared now this is not a mystery to any of the sophisticated investors in the world who are looking at this financial Information and deed people were writing about it and it was it was out there it's not a mystery to the supervisors who are looking over this bank in fact they've had insight into this much longer than the public has since they've known what these Securities are for a long time so along the way what is everyone doing everyone is or let's

say the supervisors for sure but certainly the the the sophisticated commentators and the a lot Of very sophisticated people who have their money in Silicon Valley Bank basically saying a Silicon Valley Bank you know it would probably be good if you had a little more of a cushion right we recognize that if we Mark only part of your balance sheet to market then you might look insolvent and from an accounting perspective you're still solvent your assets are worth more than your liabilities but overall this is not really it Doesn't make us feel super safe and

Silicon Valley Bank management understands this as well so they're actually during some of this time trying a variety of different ways to raise some Equity Capital so they're out there saying let's get let's get people to actually hand us over money but it's not debt it's not a deposit we're not promising to pay it back it's an investment it's like stuck okay that would go in the equity part of The balance sheet and they're out there looking for that and people are kind of hanging around watching that then one day they end up disclosing that

they've sold some of their securities and when they sold those securities it wasn't particularly new information people already knew that those Securities were a little bit underwater but now they had to actually recognize some of these losses very specifically Once you actually sell it you have to admit to it and recognize it that's kind of a funny thing well we figure they're out there looking for some equity that would be the easiest thing for them to do get some Equity announced they have some Equity everyone thinks the bank is strong instead they're selling some of

these Securities they're selling them at a loss and kind of admitting it that's the kind of thing that makes you A little bit nervous I mean again just looking straight at these numbers here on a mark to Market basis it's not clear they could pay everybody back and now we see them selling some things just kind of signals maybe they haven't been able to get anyone to invest in them that's something you might think if you don't see all the details might have other reasons to believe that So at this point if you're a sophisticated

investor or a non-sophisticated investor you would say what am I getting out of this relationship exactly I mean at this point in time 173 billion in deposits by the time we get to 2022 half of those deposits are still paying nothing getting nothing now interest rates are considerably higher they're over four percent you can Go get a CD for over four percent you know a certificate of deposit so you're giving up a little bit more than you used to be giving up furthermore something that makes Silicon Valley Bank somewhat unique it's kind of far out

on the curve of doing this is that uh more than 90 percent of the deposits that Silicon Valley Bank had were in fact not insured by the FDIC no people have written a lot about this I won't belabor it people watching this video who have managed to get this far probably have heard this part of the story but when you put your money in a bank the first 250 000 of it if you're one individual is insured and you know you're going to get it back the government's standing behind it but everything above 250 000

is not in short okay so in principle you can lose it Silicon Valley Bank had the vast Majority of their deposits uninsured uh compared to other Banks they had significantly they were way in the tail of the distribution now that's out on the country as a whole it's almost half of deposits that are uninsured so it's not a small number but it's Silicon Valley Banker was it was higher than 90 percent so here you are you're an uninsured depositor maybe you're earning zero or something a little more than zero And you're thinking what am I

getting out of this there's some chance here that's certainly not a zero chance there's some chance that they actually couldn't pay everybody back do I want to be the last person in line to get my money out if that happens what's the upside of staying too they're not paying me very much and this place down the street can do pretty much the same service for me it's a pain in the Neck it's inconvenient I had a long-term relationship with Silicon Valley Bank but I want to lose all my money so the first thing to note

here is it is not at all irrational and was not at all irrational for people on Thursday March 9th in looking at what was going on to think maybe it makes some sense that we take our money out that was a completely reasonable thing to think however uh if everybody thinks that and Indeed 42 billion in deposits came out that day if everybody thinks that it starts to be a problem because if you look at the cash side of the balance sheet there's only 14 there they're going to need to go and get another 28

billion from somewhere to hand over to people in the form of cash that's where things start getting tricky if they go and they sell more Securities to get that cash very fast well they're going to have to recognize Even more losses and frankly Securities which are pretty easy to sell if they sold all of them and everybody really wanted their money back they couldn't do it so in a world where they really had to immediately pay their deposits back and only got the mark to mark value of their Securities they'd be in trouble how about

their loans you can't sell those not very fast so they're really only options that they Had were to try to somehow find somebody who would let them borrow using these things as collateral leave aside now for a moment whether or not they're able to do that and imagine we're back in a world where that wasn't possible because for some technical reasons it's going to be really hard for them to do it here as I will explain it's easy to see how if they can't borrow on it and they can't sell it They're basically going to

go out of business and at the same time their depositors were behaving in a reasonable way now we talk a bit about Twitter and the way that people started to tell uh tell their friends and tell the people they work with go take your money out of Silicon Valley Bank 42 billion that sounds like a lot of money to go out in one day uh I think it's a red herring to blame technology for this We've been having Bank runs in the United States for as long as we've had a United States and they've always

been fast in the old days you used to be able to you you they would be fast because Banks were fairly local and you would look out your window and you would see a big line of people outside of the bank that was very viral okay very quickly you see a big long line it's outside the bank you go and you stand in it Bank runs Happened really quickly in the 19th century even before we had telephones much less Twitter and so while in this particular case the fact that it happened in Silicon Valley and

people were pretty sophisticated uh enabled it to happen in in let's say 12 hours whereas maybe in the 19th century it might have taken a couple of days it's not really the driving force the driving force is ultimately there were good reasons to be concerned about the Solvency of Silicon Valley Bank so to answer the first question posed uh in this module which is why did it happen and was there some sort of crazy kind of mass hysteria that made it happen I think that's really not consistent with the evidence and it's not consistent with

the way Bank runs have happened in the past all right so we've talked about how we got there how we got to March 9th uh and then on March 10th ultimately a decision was made uh by the FDIC in the United States which is responsible for the insurance of the deposits that were insured deposits but it's also their job when they think a bank is no longer viable to go in and take over that bank okay and what the FDIC usually does when they take over a bank is they try to very quickly find a

buyer for that bank the typical way the FDIC will do this is they'll observe they think a bank is in trouble they think a bank is not viable and they will typically try to go in on Friday after business hours go into the bank take it over and get it all sold and organized before Monday morning so then people show up Monday morning and they don't even know what happened and all their money is there and all their money is safe in this particular case because things were happening pretty fast and it's not the first

time that's happened and it's not only in the Twitter age that that happens they had to go in in the middle Of the day on Friday March 10th they went in on Friday March 10th and over that next weekend made their first efforts to try to sell what was left there at Silicon Valley Bank to another buyer FDIC ate cases is they're willing to take some losses in order to get this done so they have promised to pay the insured deposits over that next weekend they actually Said they would pay out the uninsured deposits as

well we'll be discussing that soon but once they've said those things they're going to try to get as much as they can for all the rest of the stuff that's on the balance sheet and take that money and then combine it with the fund that they have in order to do that so it took them a couple of weeks but they eventually did sell most of the elements of this balance sheet to Another bank another bank took over that's First Citizens Bank ended up buying on the asset side of the portfolio they bought all of

the loans so they had they said all right well we're happy we'll form you know we'll put this into our own balance sheet give us all the loans they also took all the remaining deposits which was significantly less by this point what's important though about this is That when they took the loans they said we're going to pay 16 billion less for the loans 16 and a half billion less for the loans then you actually had them on your books so the numbers that we have here are a little bit different than what happened in

the transaction but the difference between the loans uh how they were booked and the and the ultimately what they paid for them that's the right numbers is 16 and a half billion So that's weird I had said earlier and I would still say there's not much concern that these particular uh loans that they had made to businesses weren't going to pay back that wasn't the problem so it wasn't as though they looked at the loans and they said well I don't know you think you're going to get 74 billion but I think you're only going

to collect 58 billion that's not what happened what happened was that when they actually sold the loans The same calculation that we would have done for Securities by saying hey the interest rate on this is much lower than what I could get today so the value of it if I tried to sell it would be lower that same calculation also applies to loans we never do it because there's never a market the market isn't liquid enough to do this uh it's not the type of thing that you're going to see uh typically on on uh

bank Balance sheet in fact the only time banks are really required from an accounting perspective to tell us about these things is if they think they won't collect on the loans they think they will collect on the loans they don't have to do this kind of marking to Market so I put Mark to Market question mark here because we don't know exactly how this would have been handled from an accounting perspective it's not the same exact animal as the mark to Market on The Securities portfolio which is an account which is a very formalized way

of of doing it in the accounting statements but we have a pretty good idea because this was a mark of a mark right First Citizens paid 16.5 billion less for the loan portfolio than it had been sitting on the balance sheet so indeed if we run this through the rest of the balance sheet and we say well not only was it the case that the Securities were worth uh uh 17 billion Less than had then we had them on there but now we know once they sold this we can observe here's what the market thinks

about the loan portfolio and we didn't have that right either that's at 58 billion Okay so what's going on let's track this now all the way through where does that come out well it always comes out of equity so the loan portfolio which has been marked down now if we wanted a Market to Market By another on here 16 billion means that the equity instead of being negative 2 billion would actually be negative 18 billion so if somebody was actually really just trying to think about what is this what is this bank is this Bank

solvent or not and they were being reasonable and rational about the loan portfolio which is not something we we usually do but it's an exercise that a sophisticated investor could do they would have a Completely reasonable position if they said I think that the equity level is negative 18 billion that's really insolvent so afterwards we even learn a little bit more and indeed the FDIC has reported they expect to lose 20 billion dollars on the overall resolution of Silicon Valley Bank so what does that mean the bank's going along it's doing its thing people ask

for its money back they just start Giving its money back at some point the FDIC says we're going to stop this process then they're going to go and effectively get rid of the whole thing and they say this is going to cost us 20 billion that indicates that by some definition this bank was not solvent the story though that we will often hear around this is it wasn't really a solvency problem it was a liquidity problem If everybody had just sat tight for this entire time then the deposits could have been paid back with the

proceeds of the Securities and the loans so it's really just liquid they just couldn't pay it back right away indeed though and what we're going to talk about in the next unit is that this concept of liquidity being the problem in not solvency that's a a false dichotomy That we really don't see liquidity problems unless there are concerns about solvency and it is this imperfect way of doing accounting that kind of gets us into trouble about confusing these as two different things I've marked to market the Securities and I've marked to market the loans and

I've said boy if I do that this is not a solvent Institution okay well what's going on let's recall our picture of the yield curve from Earlier lots of lines on this picture of the yield curve this was showing us what was going on in 2019 and how it changed in 2020 and 2022. what I'm going to do now is take a lot of these lines off and add a couple more on now what we're observing is if everything has tier except the convenience yield and this is now representing the convenience yield in 2022. does

that mean convenience yield in 2022 The government yield curve shows that the government would have to pay about four percent uh or north of four percent pretty much all along their yield curve how about this time Silicon Valley Bank at this time Silicon Valley Bank is paying significantly less than four percent on their deposits it's moved up a little bit since 2019 but there's still a very big gap between what it is they are paying for deposits and what They could get if they just turned around and put that money in the shortest term U.S

government securities that are out there okay so easiest stuff to sell no risk at all they could just capture that difference so how would that work well here's where you're going to go back to this dotted line that we see here for the deposit rate the circle the yellow circle is here Telling us you can get your money out anytime you want we see where that exists relative to the x-axis this is a demand deposit you can get it out tomorrow if you want it but the dotted line is telling us something else the dotted

line is telling us we kind of hope you'll leave it here forever and indeed that is a big part of the business model of a bank So one way to think about the deposits that exist at the bank and the convenience yield that exists at the bank is that just as we have to mark down the value of a bond on the asset side the value of an asset we have to mark that down when interest rates go up well just imagine on the other side of that curve we owe people 170 billion but we're

paying a lot less on it then the market would want us to pay I don't have to pay less on it that's actually Something that's helping us instead of we're earning Less on it and it's marked down we're paying less on it well we should Mark that down too so effectively that's what's happening in a pure Market way of thinking about a bank balance sheet let's come back to December 2022. the red on the left is saying hey these Securities that you have they're paying a lower interest rate that's now out here if I actually

wanted to say what that would be worth If I went and sold it in the market it would be less similarly on the loan side you're getting an interest rate based on loans you wrote a couple years ago if I went out and tried to sell that to somebody they would pay less for it and indeed when the FDIC sold that loan portfolio they got less for it well how about the deposits actually we're saying it's 173 billion of deposits but from the perspective of the Bank it's less than that because it's just like the

same thing as the security is on the other side it's something that's paying less which we hope lasts a long time but that only works if that dotted line stays a dotted line the value to a bank of having a deposit franchise is essentially the value of hey I'm here lend me money depositor lend me money at a very low rate and Never take it out and if people believe and you have established the stability to get it that that will stay then that's worth a lot to the bank and it's worth a lot to

their franchise value so if we were to go back here we would need to find a way to put that on the balance sheet if we're going to move from an accounting balance sheet to a real Mark to Market balance sheet we have to think about the equity value To a bank of having this wonderful business of people willing to give them money and let it sit there for a long time at a below even what the government has to pay interest rate where does that show up on this balance sheet nowhere okay essentially we

don't have a way to mark that to Market and we don't really have a there's no way to put it on the balance sheet that is even a completely sensible thing so what we've done is we started with a Balance sheet that was all in Orange it was the accounting way of looking at what was going on and it assumed we held everything forever then we started marking some parts of it to Market and saying oh well if you had to sell everything today you wouldn't be solvent the bank and the investors in the bank

would say but I don't have to sell everything today I have this very stable deposit franchise mathematically what that means is I'd be adding a Number to the equity piece to represent the value of that to represent how much I was marking down actually those deposits to be equivalent to the way I marked down the securities when you if you do that the overall Market way of looking at the balance sheet would suggest solvency but that solvency is completely predicated on the idea that the deposits won't leave and the deposits get particularly Twitchy to leave

when they go and they look at your solvency without that value and it makes them nervous so in this way the liquidity the ability of the bank to hang on to its deposit base isn't is just all tied up with the notion of how solvent it would be if that deposit base was not in fact stable [Music] Okay so we've covered the what happened And our second big question is why did the government do things the way they did it so what could the government have done differently here why why why why why did they

take a series of steps the first step is um why not just accept the Securities the 120 billion of Securities and the 74 billion dollars of loans why not just have the Federal Reserve accept those as collateral and Loan the full face value on them and be done with it uh they could give all the money and if you actually give them all the orange that they need they could pay all the orange on the asset side they could pay back all the all the orange on the deposit side and there are a few answers

to this question I think the the the simplest one though is to just note that um from the perspective of an honest lender whoever that lender is uh that Lender the Federal Reserve in this particular case lending to Silicon Valley Bank really would have to recognize that what they were receiving in Mark to market value was less than 120. so in a very real way they're not fully collateralized right and the way we've set up our our our Baseline emergency lending facilities in the United States is that the FED needs to be fully collateralized they're

not supposed to just hand out more money to The banks than their things are worth now you may have read that some changes were made in the midst of the crisis that's so in the in the midst of these runs for some other programs somewhat beyond the scope of what we're talking about here today but the standing facilities that exist quite logically say we're not gonna just pretend that this stuff is in the market worth more uh uh than than what the more that that's not worth more to us is Collateral than it's worth in

the market and so the first position that the Federal Reserve is in or any lender to Silicon Valley Bank is that if we take seriously what these things would be actually worth as collateral there's not enough okay and the general rule to that which is an important general rule in dealing with other types of Bank runs other types of crises that might happen outside of banks Is that you cannot lend your way out of what is ultimately a solvency problem you will need to effectively be providing some sort of subsidy when you're doing it so

they could have said oh we'll lend you based on all of this and will charge you a very low interest rate when we do it that would be a subsidy that would be legitimately the word that we would use for that would be bailout and that's not part of the standard operating procedures that they Do so that's why it wasn't easy to immediately lend now there's a bunch of technical issues uh that are not surprisingly when you have 120 billion dollars floating around of things it's hard to move that around real fast and lend on

it but even if you could solve those problems you still have the fundamental issue which is that if you had to liquidate the thing all of a sudden It probably wasn't solvent okay how about what the FDIC did so we've talked a bit and there's a lot of discussion uh uh uh by commentators about the deposits and about the fact that the vast majority of them north of 90 percent were not insured yet over the weekend following their their uh announcement of the takeover on March 10th the FDIC used the powers that they have to

declare what's called a systemic risk exception to say this is a Systemically important resolution that we're about to do which gives them the flexibility to do things like say we will pay the uninsured depositors back now this is thought of I think and it's certainly reasonable to think of this as a bailout of the uninsured depositors where we think of bailout as we're giving them something they weren't promised ultimately some combination of other players in the economy and it's Not pure it's not a taxpayer it's not the way they structured it it's ultimately going to

come from from Banks and their customers um but uh ultimately some parties are being asked and forced to hand over money to the uninsured depositors of Silicon Valley Bank they've been bailed out why do that and I I expect although we're still in early days that there will be a lot of discussion and time to come uh in the weeks to follow about who Benefited from that and who were the uninsured depositors who ended up getting bailed out and why are these people uh and companies being many of them wealthy benefiting and I think that

uh I haven't talked to the people who made this decision but I know how I would have been thinking about it in their shoes which is that it really didn't have anything to do with those depositors what it had to do with is this picture The difference between the dotted yellow line and the Orange Line okay the difference between those two lines is this convenience yield this franchise value for banks for any Bank not just for Silicon Valley Bank where does it come from it comes from the idea that that yellow circle actually isn't out

of line because it's not even though people can take their money out today if they want to they Generally don't because they generally feel safe and they generally feel as though they're getting some convenience from what they're doing and thus the bank is capturing that difference what happens if the FDIC says well bad luck on insured depositors you're not going to get your money back essentially at that moment that's a pretty strong statement to everybody in the United States almost half of the deposits in the United States are Uninsured it's a pretty strong statement you

are very much on your own now why didn't people think that already they're uninsured they didn't think that already because historically sometimes they get bailed out sometimes they get helped and the government has no real credible way of saying we're never going to do that again so if you were an uninsured depositor at the end of 2022 you probably thought I'm probably safe if you were an Uninsured depositor on March 12 2023 and the government said absolutely not we are not going to take we are not going to bail out uh the uninsured depositors of

Silicon Valley Bank whatever you thought your probability was of getting bailed out before it has gone down and if it has gone down that dotted yellow line here which means we think we're going to leave our money in here forever suddenly is a little fuzzier and the Value that every Bank in the United States gets from people being happy to leave their money with that bank at a low level feeling that safety and willing to pay that convenience yield false so if you are back to our balance sheet thinking about solvency and you know that

a big piece of the ultimate solvency is tied up with liquidity and with the value of having a very very sticky and calm deposit base and you say these uninsured depositors who thought Were probably covered turns out they're not covered in this particular case then all across the country that peace that value that every bank has drops and the concern that you would have if you are thinking about this problem from the country's perspective is that's an actual real value thing that's a thing that not only every Bank in the country has as part of

what makes them valuable but enables them to do their job then of of making loans And if we pull that back if we suddenly take away people's confidence in that then we're going to see problems that more than just a couple of things and indeed the runs that we have seen in history which are very illustrative for thinking about the Silicon Valley Bank runs help teach us that lesson because until the 1930s we had no national uh Deposit Insurance in the United States and we used to have runs a lot right and when those runs

would happen They would quickly get contagious when people saw there was a problem at One Bank it immediately brought their attention to the question of what was going on at their bank and once you look really carefully and start thinking about what it is that you're paying for a lot of people start to move their deposits you effectively take something that seems strangely ephemeral and make it ephemeral so it used to be stable deposits and it becomes unstable Deposits with much less value not just to One bank but to the whole banking system [Music] thank

you the third big question that we want to answer is why do things this way seems kind of crazy right why have a world where we're just uh running this risk that suddenly the deposit franchise of all the banks people get nervous maybe for legitimate reasons uh and suddenly We need to come in and do something that certainly appears on some levels to be very bailouty giving money to some people who don't seem to deserve it we'd like to avoid that so let's go back to our balance sheet and here's our balance sheet with with

just the orange on it and let's imagine setting it up a different way okay so uh if we recall we have our deposits the deposits are extremely Short and the one of the dangers that we had is we had all this long-term stuff also on the balance sheet and the long-term stuff well they I can fall in value when interest rates go up and suddenly leave us with some solvency problems one thing that can happen so there's a set of proposals that have been circulating for really quite a long time uh in in policy circles

and among academics which is just why don't we Make this a little more Linked UP why don't we just back things that are effectively like money deposits with other things that are short-term so instead of having the asset side of the balance sheet have on it all kinds of Securities and all kinds of loans let's just have short-term Securities think government treasury bills that have a 30-day expiration have that be the only asset and have the only liability or the main Liability the same thing that we see here which is just deposits okay in that

world we're going back to this Banks can still make money because they're going to pay the yellow Dot and then they're going to earn a return equal to the blue very very close to the yellow dot all the way over the shortest term blue so banks will still make money they'll still provide this service which is turning government treasury bills Which are not a very useful thing to use to pay for your morning coffee into something that you can use to make payroll and if you're wanting coffee and that's known as narrow banking you know

that you've got a bank the bank is going to be very focused on on the creation of money through through backing up deposits and it's going to always back it up with the government uh with short-term government securities where you don't have to worry about them Falling in value they don't move very much when interest rates change all right going back to our balance sheet now you can see what that would look like it's even simpler than the balance sheet that we originally started with what would be the problem with this what's gone from the

balance sheet that we had before main thing that's gone the most important thing that's gone is loans Right who in this economy makes the loans who is it that is going to make sure that small business gets loans that mortgages get paid now you might say well gee I thought there's a lot of non-banks that are involved in those things there are but very few of them are operating totally independent of the banking system at the core of what's financing a lot of that is still deposits who the Extent that your economy needs to have

loans that are long-term and just frankly most things that give us value take a while to come to fruition on one side of the balance sheet and on the other side of the balance sheet people needing to get their money quickly so something that's very short-term like deposits if your entire economy somehow needs to do it making sure that the things that we call banks are not the place that it's happening doesn't mean That you eliminate the risk that your overall economy will crunch up when Suddenly It's unable to pay for the long-term stuff with

the short-term stuff indeed one can think of the global financial crisis as essentially that happening that in the global financial crisis if you recall the names of that time names like Lehman Brothers and bear Stearns and AIG The big failures and Neil failures were not Banks they were non-banks they didn't actually have any deposits instead they were involved in in ways of doing the types of stuff that Banks did but without deposits if you create a world where the banks are super safe because they're not doing any of this turning stuff from long term into

short-term and Back Again some other institution will do it and we would be fooling ourselves if we think We had fixed the banking system or fixed the financial system by making sure that Banks themselves the things that we called in English banks didn't have this problem because the problem would migrate the ultimate cause of this is something that is fundamental to capitalism and that is the things that give us value either our educations or our house that we live in for a very long period of time or the crops that we plant or research and

development for a New Drug take a long time and many of them are uncertain and what we need day-to-day is to be able to pay for our food and so what the financial system effectively does is transform claims on all those long run things in a very complex way so that we have something that's called money that we can use in the economy making sure that that doesn't happen in one very specific place or another specific Place does not Eliminate the need for it to happen somewhere in the financial system foreign [Music] big question is

uh if we're going to have a system that looks like the one that we have now with something that looks like Banks what should we do to try to have this not happen anymore um and here the answer gets a bit more complicated Since ultimately we're trying to do this Alchemy of taking something that is long-term and enabling to have short-term deposits and claims on that long-term thing if we're going to do that we're ultimately always going to have some kind of risk in the system that maybe there's not enough to pay us back here

the typical way that this gets handled and I think it's the right solution it's just that we have to do the very best That we can uh to try to make it to try to technically make it work as best as it can the typical solution is back to the balance sheet so we look here at the balance sheet and we look at where we were for Silicon Valley Bank in December 31st 2022 where they had 15 billion of equity and that 15 billion of equity was sitting below 212 billion of assets so the first

thing that we do is we say I want to make sure that that's really 15. or maybe I want it to be even more than 15. okay so that's called Capital regulation and you will hear a lot about this in the months to come and if possibly you're watching this thing in the years to come I'm sure people will still be talking about it which is one way to make the bank safer is to make sure that they have more Equity relative to every unit of asset that they have that would give you more of

a cushion if we think about why we had a problem here the value of our assets fell and it fell By enough to wipe out all the equity so why not just have more of it one complicated question that's out there is why not have a lot more of it so gee if 15 got wiped out maybe we should go to 30 and by the way maybe we should go to 100. uh what if half of this stuff was equity that unfortunately is a question more complicated than I can answer in this uh six minute

uh period suffice to say that the main problem the main challenge of That is that if you tell a specific bank that they have to have a whole lot of equity ultimately where that comes out of is deposits so if you look at this balance sheet here and you said you must have to support this same amount of assets half Equity well that means it would be a lot less in the way of deposits and remember deposits are the way they make money one of the main ways that they make money so if you were

to tell the bank you can't do that anymore As much as you were doing it it's a problem and Banks don't have a monopoly on doing it other types of financial institutions can do things that sort of look like it and the banks end up sometimes being driven out of business so that's the problem with making it go unbelievable High but could it be higher could we be much more careful in how we calculate it could be more on top of it sure we absolutely can the other thing that people pay attention to is how

much Remember the thing really keeping it solvent in a market sense is the value of that deposit franchise right the fact that people are willing to leave their deposits in there so the other types of requirements that we try to get at are things that try to address how sticky those deposits are just how valuable that franchise is and How likely is it to disappear and those are generally called liquidity requirements and they're relatively new we didn't Have them in the same formal way that we have them today until after the global financial crisis and

so to some extent there's still a work in progress uh and they can be made better and they probably could be made better in a way that they will work better with the capital requirements which the earlier thing that we discussed think though that it's really important to note that if we knew everything that we Needed to know about how to make this system safe it's probably still the case that we would occasionally get bank failures and we would still occasionally get bank failures that turn contagious why is that ultimately the financial system is a

machine that's turning our short-term savings stuff into these long-term Investments and the Machine itself is going to have in it just this inherent risk that there Is no such thing as short-term stuff that you can demand tomorrow that just grows on trees we have to manufacture it and we can make that system very very safe but it will be at some cost to its ability to function it's the same problem that we have with almost anything in our society where there's a trade-off between safety and efficiency it's still the caves in the city that I

live and perhaps where you are too that we have far too many traffic fatalities Far too many people in cars and out of cars being harmed by cars we could greatly reduce those by lowering all speed limits to three miles an hour and having unbelievably High penalties if you're caught speeding that will greatly reduce all of the traffic fatalities we have with obvious costs to efficiency in the banking system it's harder to see those connections but they're there it is the case that when we decide to push Really hard in one direction to make one

piece of it more safe two things happen the activity itself that we've made safe on one road by changing the speed limit there moves to another road if we can find all the roads that people are on and change all those speed limits now we're in a place where it's really hard to get anywhere and that is an inextricable problem from having a financial system so the second piece of what it is that we need to do Is not only do we need to do the best we can to make sure that our financial roads

are safe but we also need to think really carefully about how we're going to deal with the system when it occasionally breaks down knowing that that's something that is just part of the way the financial system is set up in this module we discussed the failure of Silicon Valley Bank a very instructive case for understanding Banking and bailouts nice and simple If you want to go deeper and understand very complicated cases in banking and bailouts I encourage you to study the global financial crisis of 2007 to 2009. thank you