Follow the link for the full summary: bcf.princeton.edu/events/lawr...
On Thursday, March 16, Lawrence H. Summers joined Markus’ Academy for a lecture on Lessons from the SVB Bank Failure. Lawrence H. Summers is the Charles W. Eliot University Professor and President Emeritus of Harvard University. During the past three decades, he has served in a series of senior policy positions in Washington, D.C., including the 71st Secretary of the Treasury for President Clinton, Director of the National Economic Council for President Obama and Vice President of Development Economics and Chief Economist of the World Bank.
A summary in four bullets:
- This was a very poorly managed bank without a chief risk officer for many months. Supervisors don’t seem to have been on the case. The episode highlights important issues of how we incorporate fluctuations in market value in bank balance sheets.
- SVB shows that the concept of uninsured deposits needs to be thought through carefully. If the failure of a bank with 1% of the system’s assets constitutes a systemic event because of the contagion, then we need to rethink the structure of our financial system.
- Lagarde gets an A+ today. It is important to signal resistance against financial dominance and the idea of slacking off in fighting inflation because of financial stability
- While there are many important lessons for us today, I would be surprised if students of a US history course in 2035 will have cause to learn about this particular episode, and that's how we want it to be. The same could not be said about 2008
Timestamps:
[0:00] Introductory remarks
[4:20] What went wrong with SVB?
[18:42] Banks’ pricing power on deposits
[28:47] Prompt interventions
[40:53] Monetary policy implications and financial dominance
[49:28] Lessons for financial architecture
[54:16] Lessons for the rest of the world