Backward analysis - the run on SVB

There always exists some economic indicator that would have predicted the most recent crisis. This indicator is flawless in its predictions only after the storm has hit the town. Seasoned readers may remember the famous TED spread that “experts” talked about only after the sh had hit the fan in 2008.

Today, in March 2023, I have been receiving waves of financial “analyses” from well-intentioned strategists at investment banks. Lots of data and bar charts and trend lines that highlight the indicator du jour: unsecured deposits.

“Luis, when you measure counterparty risk, you cannot ignore unsecured deposits. Look at what just happened to Silicon Valley Bank and First Republic!
And to make your life easier, we have put together a cross sectional view of unsecured deposits vs. secured deposits at a gazillion banks.”

Call me old and bitter, but indicators that would have predicted the future had we only known about them at the time are good for storytelling and that’s about it.

Weren’t bank deposits, especially retail, viewed with reverence during the financial crisis? Bear Stearns, Lehman, CIT, etc. did not have deposits and funded themselves in the ill-defined, catch-all wholesale funding markets, which were fickle and accelerated their demise. Deposits, on the other hand, were “sticky” money.

Alas, not that sticky in 2023.

Evidently, no matter how many times we modify the regulations, business practices, or risk management techniques, there were, there are, and there will always be run on banks. The root is the fractional reserve banking system which allows a bank to maintain in reserves a fraction of its liabilities.

But there’s nothing wrong with that, other than bank runs of course.

it’s just the risk-return relationship

At a higher level of abstraction, it’s no more and no less than the risk-return relationship in action. It comes with the territory of capital formation, money creation, capitalism, risk taking, entrepreneurship, and economic growth.