EFA RPN Webinar - Stagflation Stress Test and Marking to Market: Lessons from SVB and Beyond

Moderator: Elena Carletti, Bocconi University, CEPR & EFA RPN co-Leader

 

Presenters: Viral V. Acharya, NYU Stern School of Business & CEPR and Stephen Ryan, NYU Stern School of Business

 

Commentator: Carmelo Salleo, European Central Bank

 

 

What immediate and long-term policy lessons need to be learned from the failures of Silicon Valley Bank, Signature and First Republic earlier this year due to interest-rate risk and fragility of uninsured deposits? NYU Stern White Paper and CEPR Rapid Response Economic Report, "SVB and Beyond: The Banking Stress of 2023", provides some answers.

 

In this webinar, Viral V Acharya made a case as to why in the short run, regulatory authorities in the United States may have to adopt their rulebook from the confidence-building stress tests of 2009, undertake a stagflation stress test that reviews banks’ asset quality, and restore capital adequacy as needed. Illiquid banks with bigger shares of uninsured deposits should be asked to finance a larger share of their assets with equity. Stephen Ryan then explained that for capital adequacy norms to work well, policymakers should undertake accounting reforms that ensure that mark-to-market losses flow into capital in a timely through-the-cycle manner. In particular, accounting rules should not grant banks discretion that contributes to financial fragility. This fragility results because banks' common economic hedge of fixed-rate assets with sticky uninsured short-term deposits fails when interest rates rise sufficiently, causing the assets to experience large economic losses that lead their deposits to run, eliminating any offsetting economic gains.