Kate Judge and Peter Conti-Brown on the Lessons Learned from the 2023 Banking Panic

Episode Summary

Executive Summary: The episode examines the 2023 U.S. banking panic, focusing on SVB, Signature, and Silvergate, and asks whether the episode was a true panic, a supervisory failure, or a broader policy failure. Guests Kate Judge and Peter Conte-Brown argue that interest-rate shocks mattered, but weak supervision, incomplete rules, delayed regulatory response, and unclear crisis tools were central. They stress the need for independent investigation and targeted reforms.

Main Topics: Was 2023 a banking panic or a bank failure episode? (Priority: 5/5): The guests debate whether Silicon Valley Bank’s collapse reflected classic panic behavior or a run on an unsound business model. They emphasize that history will determine whether the episode is classified as a panic or a justified market discipline event. Supervisory and regulatory failures (Priority: 5/5): Both guests argue that supervisors missed abundant red flags—rapid growth, concentration risk, and heavy Federal Home Loan Bank borrowing—and that the failure to act earlier was a major problem, not just the banks’ own risk management. Interest rates and macro shock (Priority: 4/5): Rapid Fed rate hikes increased unrealized losses on bank securities and exposed duration risk across regional banks. The guests agree this was necessary but insufficient as an explanation, because supervision should have anticipated the risk. Emergency policy tools: systemic risk exception and 13-3 (Priority: 5/5): They discuss the Fed/Treasury/FDIC decision to guarantee deposits beyond the insurance cap and to use the Fed’s unusual emergency lending authority. Both see the decisions as plausible but insufficiently explained and in need of clearer principles. Congressional oversight vs agency self-review (Priority: 4/5): Judge and Conte-Brown strongly favor a serious congressional investigation or commission over quick internal Fed/FDIC reviews, arguing that independent fact-finding is essential for credibility and reform. Deposit insurance reform (Priority: 4/5): The conversation weighs whether to scrap or redesign the $250,000 insurance cap. Conte-Brown rejects unlimited insurance, favors differentiated coverage for individuals vs small firms, and warns against expanding public guarantees without stronger supervision. Structural reforms to liquidity and payments infrastructure (Priority: 3/5): They discuss the stigma around the discount window, the potential overuse of 13-3, the par-valued Bank Term Funding Program, and outdated Fedwire/discount-window hours that may have worsened stress.

Key Arguments: Rising interest rates were a necessary condition for the crisis, but not sufficient; supervisory lapses and risk-management failures allowed the shock to become a bank run. The relevant question is why emergency authorities had to be invoked at all, and why regulators did not intervene earlier despite clear warning signs. Large regional banks like SVB and Signature should face more rigorous regulation because institutions above $100 billion can pose systemic risks even if they are not GSIBs. The Fed and FDIC’s rapid internal reviews are unlikely to produce reliable accountability; Congress or an independent commission is better suited to uncover facts. The systemic risk exception and 13-3 may have calmed markets, but the agencies need to articulate limiting principles so markets know when these tools will be used. Unlimited deposit insurance would weaken bank competition and create politically tempting unfunded guarantees; reforms should better distinguish households from operating businesses. Discount window use should be normalized and 13-3 reserved for truly unusual circumstances, especially when the counterparty is a bank. Federal Home Loan Bank lending is a chronic issue because its super-lien gives it weak incentives to avoid lending to troubled institutions. Fedwire and discount-window hours are too limited for a modern digital banking system and can amplify runs by delaying access to liquidity.

Data Points: Banks failed: 3 - Silvergate, Silicon Valley Bank, and Signature Bank were discussed as the core failures in the episode. Deposit guarantee cap: $250,000 - The standard FDIC insurance limit that was temporarily exceeded via systemic-risk actions. Systemic risk exception coverage: Deposits above $250,000 were guaranteed - The government invoked the systemic risk exception to protect uninsured deposits at SVB and Signature. Discount window borrowing: $110 billion - Amount tapped by banks through the discount window as of the end of the prior week. Bank Term Funding Program usage: $54 billion - Fed facility launched to provide liquidity against collateral at favorable terms. FDIC resolution/takeover total: $178 billion - Amount associated with FDIC-taken-over banks in the discussion's running total. Total facility/resolution usage: $354 billion - Combined total mentioned across discount window, new Fed facility, and FDIC-related amounts. Money market fund inflows: More than $286 billion - Financial Times report cited as evidence of deposit flight into money funds. SVB withdrawal run: $42 billion in four hours - Example used to illustrate the speed of digital bank runs and social-media amplification. SVB Federal Home Loan Bank borrowing: From zero at end-2021 to the largest borrower from the Federal Home Loan Bank of San Francisco at end-2022 - Used as a red flag showing deteriorating liquidity and funding stress. Federal Reserve review date: May 1 - The guests criticize the speed of the Fed/FDIC internal reviews and note the announced completion timeline. Regional-bank threshold discussed: Over $100 billion - Used by the guests as a rough size threshold for institutions that deserve more rigorous oversight.

Pivotal Quotes: "I think it started with a bank panic, but I think a lot of it's going to depend on how things evolve from here, if it's contained or if it continues to spread." — Kate Judge: Opening discussion of whether the 2023 episode qualifies as a banking panic. "The failure here was not that banks failed, the system should be able to handle banks occasionally failing. It was the need to invoke these emergency authorities." — Kate Judge: Explaining that the core issue was the need for extraordinary interventions, not failure alone. "If you just treat them as franchisees like McDonald's on one corner or another, then the ability for depositors to differentiate ... is lost." — Peter Conte-Brown: Arguing against unlimited deposit insurance and for preserving competitive discipline in banking.

Implications: Expect more scrutiny of Fed/FDIC decision-making, stronger congressional oversight, and renewed debate over deposit insurance, regional-bank regulation, and crisis tools. The episode suggests the system needs faster, clearer liquidity backstops and more resilient supervision.