A Market Test to Avoid Another Government Bank Bailout

Published July 6, 2023

Silicon Valley Bank's failure led to several of the largest bank failures in American history, prompting government intervention to prevent widespread contagion. A mark-to-market analysis of American banks’ balance sheets reveals that many are illiquid but not yet insolvent. The government could require banks to raise capital through equity in order to prevent another widespread bank bailout.

Discussion Questions:

1. Are there other free market solutions for current banking issues?
2. Why does bank failure occur in the first place?

Additional Resources:

• Read “Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?” by Erica Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru. Available here.
• Read “U.S. Bank Fragility to Credit Risk in 2023: Monetary Tightening and Commercial Real Estate Distress,” by Erica Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru. Available here.
• Read “Resolving the Banking Crisis,” by Peter DeMarzo, Erica Jiang, Arvind Krishnamurthy, Gregor Matvos, Tomasz Piskorski, and Amit Seru via ProMarket. Available here.