The Failure of Silicon Valley Bank: Everything You Need to Know about Banking and Bailouts

Hello, my name is Andrew Metric and I am a Professor of Finance at the Yale School of Management and Director of the Yale Financial Stability Program. We are here at the end of March 2023. and at the beginning of this month, Silicon Valley Bank. a

bank

with more than 200 billion in assets went

bank

rupt and had to be absorbed by the FDIC in the United States. Today I am going to discuss the

failure

of Silicon Valley Bank. It is a very instructive case and tells

everything

you

need

to

know

about

banking

and

bailouts

can help us understand the financial crises of the past and really help us understand the global financial crisis of 2007 to 2009.

To make sense of the module I am about to do, you really just

need

to First,

know

two things what a balance sheet is for a company. A balance sheet has three main components: assets on the one hand, liabilities and shareholders' equity on the other. If you have a rudimentary understanding of what a balance sheet is, you will need it to understand what it is. In the next hour or so you'll need a basic understanding of interest rates, what an interest rate is, and how the Federal Reserve plays a role in setting interest rates in the United States with those two fundamental things.

I hope you know it. able not only to follow what I will do in the next hour, but also to learn a lot about

banking

and

bailouts

from the very instructive

failure

of Silicon Valley Bank. I have spent much of the last 15 years teaching, writing, and thinking about the global financial crisis. I have an online course available through Coursera that is free and co-taught with Tim Geithner, who was in the government at the time of the crisis, about the global financial crisis it turns out that it is really difficult to explain what happened during In the global financial crisis there are many different steps, it is not just about the failure of a bank, but different pieces of the financial system, and it has been a challenge, and I would say that in the last 15 years our collective understanding has moved a lot in the Economics professionals perhaps we haven't done a great job explaining it to the world.

Silicon Valley Bank may be my chance to make amends for that. Silicon Valley Bank is a classic example of a bank run. It has the elements of banking crises that we have had since forever that we have had very simple banking operations and what I hope to do today in just one module is explain what happened. In fact, I hope to answer four questions. The first is what really happened and was what happened just a form of mass hysteria, that's the number one big question. The second question is why the government did what it did, why it took the measures it did and did not take other measures.

Third, what we see after answering one and two is the The banking system seems a little strange, a little magical, why do we organize it that way? Maybe there is a much simpler way to organize it and finally, what should we do to prevent these things from happening? Is it possible to avoid it completely? After having watched this lecture, I hope you are inspired enough to want to go and understand what a massive financial crisis was 15 years ago and with the background and the simple way in which the Silicon Valley Bank failed and helps us understand the banking system and bailouts of the banking system, you will be ready to really understand the granddaddy of all crises, the global financial crisis, so that's our goal here and I got a set of, I hope, short units, each of which will take us through the steps necessary to respond. these four big questions um, going over the whole thing will be the issue of the bank's balance sheet because the bank's balance sheet is actually where their factory is, where all their business is really done.

You may be familiar with balance sheets by In typical businesses, we have two sides of the balance sheet: the left side is the assets side of the balance sheet and on the right side are the liabilities and equity, and the idea of ​​looking at the balance sheet of any business is to understand this.

everything

you have and here is everything you owe and what has been invested and for banks it is something particularly simple what you see now in front of you is the balance sheet of Silicon Valley Bank as of December 31, 2022 this is an officially balance sheet audited the accountants.

They've been through this and you can see that on the asset side of the balance sheet they have $14 billion in cash, they have $120 billion in securities, things like bonds, they have $74 billion in loans. , these are loans that have been made to others. companies, so even though it's a loan to that company, it's an asset to Silicon Valley Bank because they need to be repaid and they have four billion other assets in total at the end of 2022, they have $212 billion in assets, how? Do they pay for those $212 billion in assets? Well, that's the other side of the balance sheet, your liabilities are divided into three parts, by far the largest part of those liabilities are deposits, so if you are a depositor in a bank, you consider it your money, but it What you have actually made is a loan to the bank, so when you give money to the bank it is your deposit, they promise to pay you a certain amount of interest and you can withdraw it whenever you want.

That is a loan that the depositor has made to the bank, so it is a liability of the bank, the vast majority of the financing they have to buy the 212 billion dollars in assets comes from deposits that people have put in their bank , we have 173 billion of which they also have 5 billion of long-term debt like a bond where they will pay it in a time that is longer than a year. They have 19 billion in other debts, mostly short-term debt, that they are paying to various federal entities, the full amount. of liabilities is 197 billion, the difference between what they owe and the book value of what their assets are worth is 15 billion and that is called their equity, okay, so sometimes we think from the perspective of an investor that invests in these things that the capital is in the form of shares, uh, and the liabilities often have a lot of bonds here, most of the liabilities are deposits, some of the capital is shares, but those shares are owned by some kind of large holding company that is at the top.

What you can see on this balance sheet in the top right corner are two little things: net interest income and net interest margin. Net interest income represents here, you see, it's 5 billion, that's the total amount they're earning on their assets minus how much they have. to pay their liabilities the net interest margin of 2.2 percent tells you what percentage it is of the overall base net interest margin of $5 billion which is virtually their entire business they borrow deposits long-term debt other debt they have investors who have given them some capital and then they go out and buy assets and make money just by making their assets earn more than they are a lot, then they have to pay their liabilities much simpler than even a company that cuts your hair and charges you. because of the cut and you have to pay rent and labor and all this other stuff here, we can read it all on the balance sheet, but to understand what happened with Silicon Valley Bank we have to dig a little deeper into exactly where the interest margin comes from net, so this is where we start with $212 billion of assets and $212 billion of liabilities plus equity, the story of what happened to them, which started around this time in late 2022 and lasted for the next two months and The change until finally Silicon Valley Bank needed to be rescued in a way and resolved by the FDIC in the United States was that the depositors of these 173 billion that they had at the end of 2022 began to ask for their money back and one You would wonder why he would do it. that is because the assets on their balance sheet on this side accounting is 212 billion dollars in assets, that is, much more than 173 billion deposits, there is a lot of money there, depositors should not worry if they only count with the book value, but also even if we just do common sense values, the cash is cash, that is, 14 billion, the values ​​that were worth 120 billion dollars.

Securities are largely very, very safe things, many of them are liabilities of the US government, which is as safe as they can get from the perspective of putting it on their balance sheet, they have 74 billion in loans, but no one said they thought those loans were not going to be repaid, that's one way banks often get into trouble. make loans if you can think about the mortgages that were issued before the global financial crisis in 2008, they will make loans, we think, oh, these are not really good loans, they are not going to pay and that would be A reason to worry maybe is that 74 billion is not really worth 74 billion, but there were no major questions at this time about these loans not being repaid.

Most people thought that those Securities, if they held them for as long as the Securities were available, would end up paying back the 120 billion face value that they have and the same with the loans, so there really wasn't a question, neither from a common sense perspective nor from an accounting perspective, why depositors would feel the need to rush to take their money. because they were nervous about the bank, why would they be nervous about understanding what happened to Silicon Valley Bank in March 2023? All we need is to go back a couple of years and understand how you grew from before Covid, which will be helpful in establishing the stage where we can then take a closer look at your business model and see how these different pieces fit together.

What we have now on the screen is the balance sheet for 2022 and the key things, if we look at some of the big numbers on this sheet, they were 120 billion. Securities had 74 billion loans had 173 billion deposits these are the big numbers that are there, let's take a look at how that changed in the previous three years this is just a snapshot of four useful balance sheet items Deposits of securities loans and stocks in blue is where they were at the end of 2019. and in orange is where they were at the end of 2022. You can see that this is really massive growth.

Deposits went from 62 billion to 173 billion, so they had 111 billion more dollars that they had to decide what to do with, another 9 billion in capital, most of the dollars that came in ended up going to securities, so 91 billion went to securities, while only 41 billion went to new loans. for businesses, so it's not really that surprising, let's think about what was happening from the end of 2019 to the end of 2022: once covid hit, there was a lot of stimulus in the economy coming from both the government giving money to people . businesses where they thought they needed it and from the Federal Reserve that was pushing interest rates further down there was basically a lot of liquidity and particularly the area of ​​the country that Silicon Valley Bank served was also seeing a boom in investment.

During part of this period, many of their clients, predominantly their largest clients, were technology companies, uh and uh, venture capitalists who invest in them and the people who are often rich people who work in those places, uh they were particularly particularly highly liquid times and They took a lot of that money and put it in their bank, but it's hard to get that 100 and it's hard to get 111 billion dollars in deposits for new loans that quickly, so for some of it just They bought securities and they mostly bought securities that were extremely safe, but that's a very important context to recognize here, this is not a bank that was just moving along nice and steady, this is a bank that grew very fast and, In fact, for the people who monitor banks for Regulators for supervisors, they often see the very rapid growth of a bank as something that needs to be examined immediately and more closely, but it is important to note that here we do not There is no statement that they went out and bought assets that people thought were bad assets, it makes no sense what they got here with something like subprime mortgages or loans that were extremely risky for companies that could fail quickly.

No, most of what they did is in this column, going from 29 to 120 billion where I bought safe government securities, so how can we get in trouble by doing so? Now let's go back to 2019 and take a look at the balance that is there in 2019. What we see here are the numbers in the image above. much smaller than the numbers we saw in 2022, the total amount of assets is 71 billion, the total amount of liabilities in equity is 71 billion, they always have to add up on both sides and if you look in the top right corner you will see that The net interest income at this time was only 2 billion, so it looks like a much more profitable company in 2022, when it was 5 billion, than here with 2 billion, but of course the asset base had increasedconsiderably between 2019 and 2022, so perhaps it's not so surprising that they are earning more net interest income, but where does that come from?

He said that the whole business of banking is to earn more with your assets than with your liabilities and your capital, and there are three components that go into that, what we are going to do now is unpack those three components and once you understand what they are those three components and where they come from, it's easier to see how Silicon Valley Bank got into trouble, other than the balance sheets, the other one. A very important image that we must see is the performance curves. What we see in this graph is a basic yield curve for the US government at the end of the year 2019.

The y axis is the rate paid in percentage and on the x axis is time, time is not drawn to scale. As standard, we like to break down the first few years, going from one month to three years. in much smaller chunks and then stretching it out over 30 years, this gives you an idea of ​​what it costs the US government to borrow over all of these different horizons. The yield curve is essential to understand what is happening. in any financial business and usually the yield curve has an upward slope like you see here, so this is the actual yield curve from the end of 2019.

On the left side you can see that for a month if the government is asking borrowed for 30 days, which is something you do often, you would have to pay about 1.5 percent. We also say that 150 basis points is approximately 150 basis points; At the other extreme, if the government borrows over 30 years, it would be closer to two and a half percent or 2.4. percent to be more precise, then the difference between what it would cost the government to borrow in the short term and what it would cost the government to borrow in the long term is almost a full percentage point.

I'm going to put a dotted line here so we can If you see that difference, we would call it a term spread, so in general, if you go back through the entire history and you're always borrowing, for example, at a very long term short and paying the interest rate of a 30-day interest rate, but lending. long term, uh, and getting paid, you're usually just going to make a profit on that alone. Now there is a lot of debate about why this is the case and it is not always true, but it was important to note that it is generally true and it is.

It's generally a reason that banks can make some money because if you think about a type of loan, a bank often thinks about a mortgage loan, which will be for 30 years, the average payment will not be 30 years, but one third of thirty. year, uh, a 30-year transaction and that will typically have a higher rate than a similar type of loan that would be very, very short-term, so they typically get most of their liabilities short-term and a lot of their Assets take a while to mature, they typically earn a term spread, so part of this net interest margin is just the difference between what you generally get from borrowing short-term and lending long-term, a second part, although it comes from the fact that some of the loans in 2019 at the time they were drawing these pictures, half of their assets came from loans that they issued, not securities, not a government yield curve, but something a little riskier.

Fortunately, government loans are still essentially considered risks. -free, but when it is lent to a business it is not risk-free. When we think about a typical banking business, the typical things they do, we often think about them finding good investments, good businesses to lend money to. a restaurant would be an example or in Silicon Valley you could be lending to some type of technology company. Often you will have some guarantee, maybe a very good guarantee, but you will still have some risk and because of that risk. the red line here, the risky lending curve line, will generally look like a risk-free line in blue with a little extra peace here is the part we call the credit spread in this example.

I just gave an educated guess that this is about 150 basis points, 1.5 percent higher than the risk-free line, the exact number doesn't matter for the discussion we're going to have, but it's higher now. Keep in mind that you will only get that if the investment pays off, so this is not the case. the same as saying that they expect to get all that credit spread, but if they are brilliant, brilliant lenders and they know exactly, with perfect foresight, who can pay and who can't, and they are able to capture this difference, then they always Banks often get involved in trouble when they make mistakes on that and even though they hope to get the red line, they may end up getting zero, but if they get the red line, then they get this extra piece.

The third thing that makes the difference between what banks have to pay on their liabilities and what they get on their assets is the fact that, as we saw, most of their liabilities are in the form of deposits. circle, that's the actual average amount Silicon Valley Bank was paying for its deposits at the end of 2019. Half a percentage point 50 basis points, in fact, two-thirds of deposits at Silicon Valley Bank at the end of 2019 were paying zero, it's possible that Ask well, why would people be willing to accept zero? Well, it's actually not that hard to understand, let's go ahead and then talk about why that might happen, so I extended the dotted line here on the deposits, I extended it from the circle, the circle.

It is very, very close to the axis and because generally with deposits you can withdraw them any time you want, there is no deadline for them. I'm stretching the dotted line because what often makes a bank really happy to have deposits is that, although people can take them out any time they want, they usually don't, they usually take out what they need for whatever their needs are. transactions and leave a good amount of money in the case of Silicon Valley Bank, well above 100 billion dollars in its deposits, earning lower amounts. Although they don't necessarily need it every day, the reason is that deposits have what we call a convenience yield when you place a deposit in a bank, it's not the same as holding a government bond, we like to think.

It's just as safe, but it can do things that a government bond can't do; For example, you can pay for your lunch with it and pay your bills at the end of the month. Take, for example, a corporation. Imagine if a corporation had a million dollars. at Silicon Valley Bank and they were using it for their regular payroll, so money would come in, money would go out on average, there was a million dollars there and let's say they were the average Silicon Valley Bank customer and they were getting 50 basis points on their deposits , that's one percent less and these are the actual figures of what the government had to pay at that time, what would the company receive for those 100 basis points?

Well, they would receive if they had their money, it was available. They could make their payroll with that, they could make any of the regular expenses they had with that million dollars, how much was it costing them to leave it in the bank instead of running down the street and calling their broker why not? They are a big company, they have a million dollars in their bank account, they could call their broker and they could buy a government treasury bill that would pay them a full percentage more than what it cost them during that year to leave it in the bank. and earning just 50 basis points was costing them that one percent of a million dollars, that is, ten thousand dollars a year, so let's ask ourselves if it is convenient to have a place that could easily do this for ten thousand dollars a year for a company that has that kind of flow and that kind of number it doesn't seem unreasonable, so it's a service that the bank provides, it's one of the ways that they get paid when we look at this whole picture and add up those ways that they get paid. they pay. look at these three elements, they are paying, they are paying a deposit rate that is quite low, but they are providing the convenience service, they are receiving the term differential because many of the loans and also the securities that they buy are longer. term than the very short end of the curve and if they are smart investors they are also capturing the credit spread if they do their job well, all of that will ultimately represent their net interest margin with that starting point of seeing where that the bank is is making money now we can see what happened between 2019 and 2022.

These are the real lines, well the blue and yellow are real lines and the red is a reasonable indicator of where they were going to make their money from the end of 2019 What happened then? Well, we have coveted, and with kovid, which first hit us in March 2020, throughout 2020, the Fed continued to lower its interest rate target, so when we get to the end of 2020. December 31, 2020, the green line shows us what the government's yield curve is, so up to one year it's basically there at zero, you know they're paying essentially nothing, the government is paying essentially nothing to borrow, the rates Interest has dropped so much. and even if we go all the way to 30 years, we're still a little bit higher than what the government had to pay for a month's worth of stuff three years before the yield curve is still upward sloping, in fact, it's a little bit higher. a slope than it used to be, but it is significantly lower than in 2019 in just one year.

Remember that during this year, a lot of money is starting to come in this year and next year, a lot of money is starting to come in. uh uh to Silicon Valley Bank and what are they doing with it? Well, they're going to take a lot of this and you might think, why don't they put it in the safest place they can, which is also very short? It's a tough business now, they're still paying something that will seem a little higher than zero. The yellow dot would also be moving around here, but they're still paying something that seems a little higher than zero if they put it. in the shorter government stuff they're just not going to make any money at all, so they think well until we can turn this into loans, let's at least go further down the curve and get something: government securities that we're investing in. it's going to be a little bit safe, or a lot of safe, so a lot of what they did they bought direct US government obligations or things related to government guaranteed mortgages, but again, things that no one thought about then and no one thinks today they are in Now, in early 2022, it was clear to everyone that we had an inflation problem in the United States, not just in the United States, and that the main way to push it back.

That type of inflation problem is the Federal Reserve trying to slow the economy by raising interest rates. The standard medicine for what we do, if we think there is an inflation problem, that is the Playbook and while there are debates about whether the FED should have started earlier or gone slower or faster which is important for us to understanding Silicon Valley Silicon Valley Bank is what things will look like by the end of 2022 let's do that that's in orange a couple of things to keep in mind about the difference between orange and green and they're both very easy to read at a glance, the first is that it is much higher, so short rates, the shorter end of the curve, about a month, the government's T builds are already above four percent and in fact, it is a little bit higher than the 30-year-old, so the second The second piece is what we can read by looking at it.

If we look at the shape of the line, it's now basically flat or in fact slanted down a bit from the beginning to the end. If we go all the way from the beginning to the end, that difference in shape will also be important. , so this change, if you think about what happened, a lot of money came in through deposits and they were pretty much stuck on being somewhere on the green line by that and then by the end of 2022. suddenly the world was on the Orange Line note that the orange line is considerably above all of the 2019 lines, including the risky ones, that means the government, the US government, if you wanted to borrow 30 days , had to pay a higher interest rate. than Silicon Valley Bank could probably expect to earn on any of the assets they had, okay, so we have a lot of assets available, summer loans, summer securities, but if they had bought them a while ago and put them in been going for a while.

Because long-term things take a while to mature, they should generally expect to pay more if they were the government, for example, they expected to pay more for that than they would get for those assets, that's a fundamental challenge and it's not unique. from Silicon Valley Bank, this happened all over the country. We'll talk specifically about Silicon Valley Bank because we have a lot of information about it and we know that they failed, but this same dynamic is playing out in several, you know. High, more or less grade in all banks in the United States.Okay, we just saw this picture about what happened to the yield curve.

Now let's go back to our other favorite image, the balance sheet. Well, here is our balance sheet. This is what we started with this is where we are on December 31, 2022, okay, if we remember, we have the assets side with a total of 212 billion and the liabilities liabilities of 197 billion and 15 billion equity or cushion that we have in such a way that if we sold all the assets and got 212 billion and paid all the liabilities, we would have 15 billion left over, but we have also discussed what just happened in the yield curve world and one thing That's what it does and it's quite important. uh uh, it's a small piece of math, but not a big piece of math, what that does is your stock portfolio if you already have a bond and that bond promises to pay you one percent annually and suddenly interest rates go up.

So now people can go out and buy a bond that pays them four percent a year, their bond is relatively less valuable now if someone can just go out and pay a hundred dollars and get a bond that will pay them four dollars a year for a long time. time and you're sitting there holding a bond that pays you what you originally paid a hundred dollars for but it only pays you a dollar a year. Nobody's going to give you a hundred dollars for that bond, right? They would rather spend their hundred dollars on something that pays four percent and the math behind it is pretty simple, but the direct direction is very clear, which is to say, if you own things, even things that are super secure, I didn't say anything in the last paragraph about not being sure if you were going to get your dollar a year or your four dollars a year.

I'm sure of it, it's just that when interest rates are higher I'd rather put my money into something new with a higher interest rate than something old with a lower interest rate which tends to reduce the value of the property. So what would that be like? Seeing yourself reflected in the balance sheet of Silicon Valley is now where we start to get in, we start to leave the incredibly obvious and this makes a lot of sense in a world where it seems a little mysterious and magical, hey, and in fact, that is banking what What what we're going to do now in red is I'm going to mark to market the value of the securities, I mean, they have 120 billion dollars in securities, so if we imagine what that way of thinking about that is from an accounting perspective or even from one perspective The common sense perspective is that if they hold on to those things forever they will eventually give them back, you know they will get all their money back at the end of the 120 billion dollars, they all have face value, that's one way of thinking.

But because we know that the interest that those things are paying is a little bit lower, or in some cases maybe a couple of percentage points lower than what someone else could get with a different Bond if they actually tried to go to the market, take those 120. billion dollars of face value of bonds and you sell them, you would get 103 billion for this. Take that as the truth for now and I'll explain where we get it from in a minute, but imagine that that's really true, that the $120 billion you would get if you kept it because your government promised to pay you $120 billion. , but not for a while, but if you keep it, you will get it, but if you try to get it today, if you need it today, we would get 103 billion for it, what does that mean now?

What kind of other adjustments would we make to the balance sheet? Let's first recognize that we are already doing something a little funny because when we wrote the balance sheet we were following certain types of rules which are the rules that accountants tell us we have to follow and in those rules we were simply writing things down at the value that we thought we would finally get. they would give, that's why we had the 120 billion, now I'm doing something a little. different, which means well, I can actually see this being market priced. I can see what it would be if I sold it today maybe I shouldn't just write 120 billion maybe I should write 103 billion and so if we do that what effect does that have on the rest of the balance sheet?

Well, now you have 17 billion less in assets. What does that mean? Well, where does that come out on the other side? It doesn't change the passives at all, so if it were to really tick. to the market where that happens on the balance, it would change the capital that both parties always need to add, so the capital goes from 15 billion to minus 2 billion, the totals on both sides still balance at 195 billion, okay , so the important point here really is just the and using the red helps us see that because the red tells us that we're in the red, uh, is that now if you were to just say here's the market value of these securities, then also Would you say that it would be fine with me if I only had to finish all this tomorrow by selling all the assets and paying all the liabilities.

I don't have enough money to pay all the liabilities, so that's a starting point and it's always a starting point for why banks end up getting in trouble. In this particular case these numbers were known, it's not like we had a army of smart people digging into the logs to find out what this is or did it only become clear after they failed this was revealed at the end of 2022 this was revealed and it was in their presentations and everyone could see it so that would also be a little strange if everyone They could see this at the end of December 2022 and at least be willing to keep their money, why did they suddenly decide in March that they needed to withdraw their money? and again this takes us back a little bit to the fiction of the way that banking works, which is to say, when they had to reveal that actually their securities would be worth less if they were sold the accounting, the formal accounting that they have.

Let's say when they say this is how much capital we have, they're still allowed to say 15 billion and it's not completely crazy, it's based on the following way of thinking about a bank, which is, hey, those deposits are fixed, they don't. they will do. leave and if the deposits don't go away then we don't have to sell the securities and we don't have to pay off the loans and if we don't have to pay off the loans then we don't have to sell the Ultimately, they will still give us 120 for the securities and 74 for loans and we're still completely solvent, so this word solvent you're going to start hearing a lot and it's basically my amount of positive equity.

The assets were worth more than my liabilities when we were talking about this as a pure accounting world, only at Orange they were solvent, they are solvent accounting here and in fact that's what they reported, although also if you look at their you can see that they would say Ah, and by the way, if we mark them to market, they will go down, so if we do a partial Mark to Market, then they would not be solvent, but it is partial, so what will make the deposit holders decide that they? Now we're scared, this is not a mystery to any of the sophisticated investors in the world who are looking at this financial information and people wrote about it and it was out there, it's not a mystery to the supervisors who are looking at this.

In fact, the bank has been aware of this for much longer than the public, as they have known what these Securities are for a long time, so along the way what everyone is doing is or let's say the supervisors for sure, but certainly The sophisticated commentators and the large number of very sophisticated people who have their money in Silicon Valley Bank basically say that a Silicon Valley Bank, you know, would probably be nice if you had a little more protection, right? We recognize that if we mark only part of its balance sheet to market then it may appear insolvent and from an accounting perspective it is still solvent its assets are worth more than its liabilities but in general this is not the case, it does not make us feel very safe and the management of Silicon Valley Bank understands this. this too, so for part of this time they are trying a variety of different ways to raise some equity capital, so they are out there saying, let's get people to give us money, but it's not debt, it's not a deposit .

We don't promise to return it, it's an investment, it's kind of stagnant, okay, that would go to the equity part of the balance sheet and they're out there looking for it and people stare at that and one day they're done. end up revealing that they sold some of their securities and when they sold those securities it wasn't particularly new information, people already knew that those securities were a little underwater, but now they had to recognize some of these losses very specifically once in actually sell it, you have to admit it and recognize it, that's a funny thing, well, we assume they are looking for some capital, which would be the easiest thing for them: announce some capital, they have some capital, everyone thinks. the bank is strong, on the other hand, they are selling some of these securities, they are selling them at a loss and, in a way, admitting it, that's the kind of thing that makes you a little nervous.

I mean, again, just looking directly at these numbers here on a market based basis, it's not clear that they can pay everyone back and now we see them selling some things, just kind of signs, maybe they haven't been able to get that no one invests in them, that's something you might think if you don't see everything. the details might have other reasons to believe that, so right now, if you are a sophisticated investor or an unsophisticated investor, I would say what exactly am I getting out of this relationship. I mean, right now, 173 billion in deposits by the time we get to 2022, half of those deposits are still paying nothing and getting nothing, now interest rates are considerably higher, they're above four percent, you can get a CD for more than four percent, you know, a certificate of deposit, so you'll give up. a little more than you used to give up, plus, something that makes Silicon Valley Bank somewhat unique, it's a little far down the curve of doing this is that, more than 90 percent of the deposits that Silicon Valley Bank had, of In fact, they weren't.

FDIC insured no one has written much about this. I won't extend it. People who watch this video and have made it this far have probably heard this part of the story, but when you put your money in a bank, the first 250,000 If you are an individual, you are insured and you know you are going to get it back. The government supports it, but anything over 250,000 is not okay in principle, you can lose it. Silicon Valley Bank had the vast majority. of their deposits were not insured, compared to other banks that had, they were significantly at the bottom of the distribution.

Now, nationwide, almost half of deposits are uninsured, so it's not a small number, but it's the Silicon Valley banker. was over 90 percent, so here you are, you're an uninsured depositor, maybe you're earning zero or something a little more than zero and you're thinking, what am I getting out of this? Here is some chance that it is certainly not zero. Is there any chance that they can't actually give everyone their money back? Do I want to be the last person in line to get my money? If that happens, what's the advantage of staying? They're not paying me much and this place is down the road. street can do pretty much the same service for me it's a pain it's a pain I had a long term relationship with Silicon Valley Bank but I want to lose all my money so the first thing to note here is that it's not in Absolutely irrational and it wasn't at all irrational for people on Thursday March 9th looking at what was going on, they thought maybe it makes some sense for us to take our money out, that was a completely reasonable thing to think, however if everyone thinks that and in fact 42 Billions in deposits came out that day, if everyone thinks that's starting to be a problem, because if you look at the cash side of the balance sheet, there's only 14, they're going to have to go find another 28 billion from somewhere. place at hand. to people in the form of cash, that's where things start to get complicated if they go and sell more securities to get that cash very quickly, well, they're going to have to recognize even more losses and, frankly, securities that are pretty easy to sell if they They sold all of them and everyone really wanted their money back, they couldn't do it, so in a world where they actually had to return their deposits immediately and they only got the value of their values ​​from brand to brand, they would be in trouble.

As for their loans, they can't be sold very quickly, so really the only options they had were to try to somehow find someone who would let them borrow using these things as collateral. Let's put aside now for a moment whether they will or not. "We are able to do that and we imagine that we are back in a world where that was not possible because for some technical reasons it is going to be very difficult for them to do it here, as I will explain that it is easy to see how they can." They can't borrow and they can't sell it, they're basically going out of business and at the same time their depositors were behaving in a reasonable manner.

Now we talked a little bit about Twitter and the way people started saying it. Tell your friends and tell the people you work with to get their money out of Silicon Valley Bank. 42 thousandmillion, that sounds like a lot of money to come out of in one day. I think it's a red herring to blame technology for what we've been through. having bank runs in the United States for as long as we've had the United States and they've always been fast in the old days, you used to be able to, they would be fast because the banks were pretty local and you'd look out your window and see a big line of people outside the bank that It was very viral, well, very quickly you see a big long line, it's outside the bank, you go and you stand there.

Bank runs happened very quickly in the 19th century, even before we had phones let alone Twitter, and although in this particular case the fact that it happened in Silicon Valley and people were quite sophisticated allowed it to happen in say 12 hours, whereas maybe in the 19th century it might have taken a couple of days it's not really the driving force, the driving force is ultimately there were good reasons to worry about the solvency of Silicon Valley Bank, so to answer the first question raised in this module, why did it happen and was there some kind of It was some kind of crazy mass hysteria that made this happen.

I think that's really not consistent with the evidence and it's not consistent with how bank runs have occurred in the past, so we've talked about how we got there, how we got to March 9. And then on March 10, finally the FDIC in the United States made a decision that they are responsible for the insurance of deposits that were insured deposits, but it is also their job when they think that a bank is no longer viable to come in and take over. takeover of that bank, and what the FDIC typically does when they take over a bank is try to very quickly find a buyer for that bank, the typical way that the FDIC will do it is they will observe that they believe a bank is in problems, they believe that a bank is not viable and will usually try to enter on Friday after business hours. go to the bank, take over and sell everything and organize it before Monday morning, then people come in on Monday morning and they don't even know what happened and all their money is there and all their money is safe in this particular case because things were happening pretty fast and it's not the first time it's happened and it's not just in the age of Twitter that that happens.

They had to enter at noon on Friday, March 10. They entered on Friday, March 10 and the following day. Over the weekend they made their first efforts to try to sell what was left there at Silicon Valley Bank to another buyer. The FDIC ate up the cases. They are willing to take some losses to achieve this, so they promised to pay the insured deposits during the next one. Over the weekend they said they would also pay unsecured deposits. We'll discuss it soon, but once they've said those things, they'll try to get everything they can for the rest of the things at stake. the balance sheet and take that money and then combine it with the fund that they have to do that, it took them a couple of weeks but they finally sold most of the elements of this balance sheet to another bank, another bank took over that is First Citizens Bank ended up buying into the asset side of the portfolio, they bought all the loans, so they said okay, we're happy, we'll form it, you know, we'll put this on our own balance sheet. all loans also took all remaining deposits, which was significantly lower at this point.

The important thing about this is that when they took out the loans they said we are going to pay 16 billion less for the loans, 16.5 billion less for the loans so they really had them on their books, so the numbers we have here are a little bit different than what happened in the transaction, but the difference between the loans, how they were accounted for, and ultimately what they paid for them, that's the correct number is 16.5 billion, so it's strange. I had said it before and I would still say that there is not much concern that these particular loans that they had given to companies were not going to pay, that was not the problem, so it was not as if they looked at the loans and said well I don't know, you think you're going to receive 74 billion but I think you're only going to collect 58 billion that's not what happened what happened was that when they actually sold the loans, the same calculation that we would have done for the securities, saying: hey, the interest rate interest on this is much lower than what you could get today, so the value if you tried to sell it would be lower, that same calculation.

It also applies to loans, we never do it because there is never a market, the market is not liquid enough to do this, it is not the kind of thing you would normally see on the bank balance sheet, in fact it is the only time. Banks are really obligated from an accounting perspective to tell us about these things: if they believe they won't collect on loans, they believe they will collect on loans, they don't have to do this kind of valuation in the market, so I put Mark to Market is a sign question mark here because we don't know exactly how this would have been handled from an accounting perspective.

It's not exactly the same animal as the mark to market in the securities portfolio, which is an account that is a very formalized way of doing it in the financial statements, but we have a pretty good idea because this was a sign of a mark right . The first citizens paid 16.5 billion less for the loan portfolio than had been on the balance sheet, so in fact, if we compare this with the rest of the balance sheet and say, well, it was not just the case that the values They were worth 17 billion less than when we had them there, but now we know that once they sold this, we can observe this is what the market thinks about the Loan Portfolio and we didn't have that right either, that's 58 billion.

Okay, so what's going on? Let's follow this now to the end. Where does it go well? It always comes out of capital, so the loan portfolio has been reduced now. If we wanted a market to market for another here 16 billion means that the capital instead of being negative 2 billion would actually be negative 18 billion so if someone was really trying to think about what is this, what is this bank, It's this bank. solvent or not and were being reasonable and rational about the loan portfolio, which is not something we usually do, but it is an exercise that a sophisticated investor could do.

They would have a completely reasonable position if they said that I think the capital level is negative. 18 billion are actually insolvent, so then we even learn a little bit more and in fact, the FDIC has reported that they expect to lose $20 billion in the overall resolution of Silicon Valley Bank, so what does that mean that the bank Is he doing his thing? people ask. to get their money back, they just start giving their money back, at some point the FDIC says we're going to stop this process, then they're going to get rid of everything and say this is going to cost us 20 billion, which indicates that By some definition this bank was not solvent, although the story we often hear is that it wasn't actually a solvency problem, it was a liquidity problem, if everyone had stayed put all this time then the deposits could The problem of Lack of solvency is a false dichotomy: we don't really see liquidity problems unless there are concerns about solvency and it is this imperfect way of doing accounting that gets us into trouble by confusing them as two different things.

I marked to market the securities and I have marked to market the loans and I said, boy, if I do this, this is not a solvent institution, well, what is going on? Let's remember our previous many lines yield curve image in this Yield Curve Image that showed us what was happening in 2019 and how it changed in 2020 and 2022. What I'm going to do now is remove many of these lines and add a couple more to what now What we're looking at is if everything has a level except the convenience yield and this now represents the convenience yield in 2022.

Does that mean the convenience yield in 2022? The government's yield curve shows that the government would have to pay around four percent or more than four percent. practically along its performance curve, how about this time? Silicon Valley Bank right now Silicon Valley Bank is paying significantly less than four percent on their deposits, it's up a bit from 2019, but there's still a very big gap between what they are paying for deposits and what they could get if they would just turn around and put that money into the shortest term US government securities that are available, okay, the easiest things to sell, without any risk, they could just capture that difference, so would they? how would it work? well, this is where you're going to come back to this dotted line that we see here for the deposit rate, the circle, the yellow circle is here telling us that you can withdraw your money any time you want, we see where that exists in relation to the x. axis, this is a demand deposit, you can take it out tomorrow if you want, but the dotted line tells us something else, we hope you leave it here forever and, in fact, that is a big part of the business model of a bank, so one way to think about the deposits that exist in the bank and the convenience yield that exists in the bank is that just as we have to write down the value of a bond on the asset side, the value of a active, we have to lower it when interest rates go up, well, imagine on the other side of that curve we owe people 170 billion, but we are paying much less for it than the market would want us to pay.

I don't have to pay less for it, that's actually something that's helping us instead of earning less and it's discounted, we're paying less, well we should discount that as well so effectively, that's what's happening in a way of pure market thinking. on a bank balance sheet, let's go back to December 2022. The red one on the left says, hey, these securities that you have, they're paying a lower interest rate which is now here, if I really wanted to say how much would that be worth if I went and sold it? in the market, it would be less similar on the loan side, you would get an interest rate based on the loans you took out a couple of years ago, if you went out and tried to sell it to someone, they would pay less for it and in fact, when the FDIC sold that loan portfolio, they got less for it.

What about deposits? We're actually saying it's 173 billion deposits, but from the bank's perspective it's less than that because it's almost the same as security. On the other hand, it's something that pays less and we hope it lasts a long time, but that only works if that dotted line remains a dotted line. The value to a bank of having a deposit franchise is essentially the value of "Hey, I'm here, lend me a loan." The money depositor lends me money at a very low rate and never takes it out and if people believe and you have established the stability to get it, that will stay, then that is worth a lot to the bank and it is worth a lot to the value of your franchise. , so if we were to come back here, we would need to find a way to put that into balance.

If we are going to go from an accounting balance sheet to a real Mark to Market balance sheet, we have to think about the value of capital for a bank that has this wonderful business of people willing to give them money and leave it there for a long time at an even interest rate. lower than what the government has to pay, where does that appear in this balance sheet? Nowhere, okay, essentially we don't. We don't have a way to mark that in the market and we don't really have a way to put it on the balance sheet, that's even a completely sensible thing to do, so what we did was we started with a balance sheet that was everything.

At Orange, it was the accounting way of looking at what was going on and we were supposed to hold everything forever, so we started marking up some parts on the market and saying, "Well, if you had to sell everything today, you wouldn't be solvent for the bank." ". and the investors in the bank would say but I don't have to sell everything today. I have this very stable deposit franchise mathematically what that means is that I would be adding a number to the equity portion to represent the value of that to represent how In reality, how much I was downgrading those deposits was equivalent to how I downgraded values ​​when you do that, the general market way of looking at the balance sheet would suggest solvency, but that solvency is based entirely on the idea that deposits don't leave and deposits get particularly nervous about leaving when they leave and look at their solvency without that value and that makes them nervous, so in this way the liquidity and the bank's ability to preserve its deposit base is not affected.

It's all tied up with the notion of how solvent it would be if that deposit base wasn't stable. Well, we have covered what happened and our second big question is why the government did thethings the way he did them. What could the government have done differently? Because? Because? Because? Why did they take a series of measures? The first step is: Why not just accept the Securities, the 120 billion Securities and the $74 billion in loans? Why not just have the Federal Reserve? accept them as collateral and lend them the full face value and be done with it. They could give all the money and if you really give them all the orange they need, they could pay for all the orange on the asset side, they could pay. all the orange color on the side of the tanks and there are some answers to this question.

I think the simplest one is just to point out that, from the perspective of an honest lender, whoever that lender is, that lender, the Federal Reserve in this particular case, the loans to Silicon Valley Bank would really have to recognize that what they were receiving on Mark at market value was less than 120. So in a very real way, they are not fully guaranteed, and the way we have set up our Our baseline of emergency loan services in the United States is that the FED needs to be fully guaranteed; They're not supposed to just hand over more money to the banks than their stuff is worth.

You may have read that some changes were made in the midst of the crisis, in the midst of these runs for some other programs, somewhat beyond the scope of what we are talking about here today, but the permanent facilities that exist, logically, They say that we are not going to pretend that what is in the market is worth more than what is not worth more for us is a guarantee of what is worth in the market and, therefore, the first position in which the Reserve finds itself Federal or any Silicon Valley Bank lender is that if you take seriously what these things would actually be worth as collateral, there's not enough good and the rule of thumb is an important rule of thumb when dealing with other types of banking operations, other types of crises that could happen outside of the banks is that you can't lend your way out of what is ultimately a solvency problem, you will need to effectively provide some kind of subsidy when you do so you could have said oh, we'll lend to you based on all of this and we will charge you a very low interest rate when we do that, that would be a subsidy, that would legitimately be the word we would use for that would be bailout and that is not part of the standard operating procedures that do that, that is why it was not easy to grant loans immediately, now there are a lot of technical problems, uh, which are not surprising, when you have 120 billion dollars floating around in things, it's hard to move that very quickly. and lend it, but even if you could solve those problems, you still have the fundamental problem, which is that if you had to liquidate the thing suddenly, it probably wasn't solvent.

How about what the FDIC did? So we've talked. a bit and there is a lot of discussion by commentators about the deposits and the fact that the vast majority of them, north of 90 percent, were still uninsured during the weekend following the acquisition announcement on 10 March by the FDIC. They used the powers they have to declare what's called a systemic risk exception to say we're about to pass a systemically important resolution that gives them the flexibility to do things like say we're going to pay back uninsured depositors now. that it is believed that this I think it is reasonable to think of this as a bailout of uninsured depositors, in which we think that the bailout we are giving them something that they were not promised, ultimately a combination of other actors in the economy and it is not pure, it is not. a contributor is not the way they structured it, it will ultimately come from the banks and their customers, but ultimately some parties are asked and forced to give money to Silicon Valley Bank's uninsured depositors, They have been rescued, why?

Let's do that and I hope that, although we are still in the early days, there will be a lot of discussion and time to come in the coming weeks about who benefited from that and who were the uninsured depositors that ended up being bailed out and why. Are these people and companies, many of them wealthy, benefiting? And I don't think I've talked to the people who made this decision, but I know how I would have thought about it in their shoes, which is that it really was that way. It has nothing to do with those depositors, what it had to do with is this image, the difference between the dotted yellow line and the Orange Line, okay, the difference between those two lines is this convenience, it generates this franchise value for the depositors. banks, for any bank, not just Silicon Valley Bank Where does it come from?

It comes from the idea that that yellow circle isn't actually out of place because it isn't, although people can withdraw their money today if they want, they usually don't because they generally feel safe. and they generally feel that they are getting some comfort from what they are doing and therefore the bank is capturing that difference. What happens if the FDIC says, well, tough luck for insured depositors, you won't get your money back essentially in At that point, that's a pretty strong statement for everyone in the United States. Nearly half of deposits in the United States are uninsured.

It's a pretty strong statement. Now you are very alone. Why didn't people think they were no longer insured? I didn't think that anymore because historically sometimes they bail them out, sometimes they help them and the government doesn't have a really credible way of saying we'll never do that again, so if you were an uninsured depositor at the end of 2022, you probably thought that you would probably be safe if you were an uninsured depositor on March 12, 2023 and the government said absolutely no, we are not going to accept, we are not going to bail out uninsured depositors from Silicon Valley Bank, whatever the likelihood. be bailed out before it's gone down and if it's gone down that yellow dotted line here, which means we think we're going to leave our money here forever, suddenly it's a little more confusing and the value that every bank in the United States gets United of people who are happy to leave their money in that bank at a low level, feel that security and are willing to pay for that convenience give false results, so if you go back to our balance sheet thinking about solvency and know that a large Part of the ultimate solvency is linked to liquidity and the value of having a very, very fixed and calm deposit base and you say that these uninsured depositors who thought they were probably covered turn out to be not covered in this particular case, so throughout the country that peace that value each bank has falls and the concern that one would have if you think about this problem from the perspective of the country is that it is a real value that not only each bank in the country has as part of what the makes them valuable but also allows them to do their job and then make loans and if we take that away, if we suddenly take away people's confidence in that, then we will see problems that go beyond a couple of things and, in fact, the runs that we have seen in History, which is very illustrative to think about the Silicon Valley bank runs, helps teach us that lesson because until the 1930s we did not have national deposit insurance in the United States and we used to have very strong runs. correct and when those runs occurred, It became contagious quickly when people saw that there was a problem at One Bank, it immediately drew their attention to the question of what was happening at their bank and once you look very carefully and start thinking about What are you paying a lot for? of people start moving their deposits, you effectively take something that seems strangely ephemeral and make it ephemeral, so that they used to be stable deposits and they become unstable deposits with much less value not only to a bank but to the entire banking system.

Thanks, the third. The big question we want to answer is why doing things this way seems crazy, right? Why have a world where we simply run the risk of suddenly having every bank's deposit franchise become nervous, perhaps for legitimate reasons, all of a sudden? We need to go in and do something that certainly seems on some levels to be a bailout, giving money to some people who don't seem to deserve it. We'd like to avoid that, so let's go back to our balance sheet and here's our balance sheet. sheet with just the orange and let's imagine setting it up in a different way, okay, so if we remember that we have our deposits, the deposits are extremely short and one of the dangers that we had is that we had all these long-term things. also on the balance sheet and on long-term things, well, I can drop in value when interest rates go up and suddenly leave us with some solvency problems, something that can happen, so there is a set of proposals that have been circulating for quite some time.

For a long time, in policy circles and among academics, why don't we make this a little more linked? Why don't we back things that are effectively like deposits of money with other things that are short-term, so that instead of having the asset side of the balance sheet have all kinds of securities and all kinds of loans, we have only short-term securities? term, I think the government treasury bills that have a maturity of 30 days are the only asset and the only liability or the primary liability is the same as what we see here, which is just deposits.

Okay, in that world we're going to come back to this. Banks can still make money because they will pay the yellow point and then make a profit. equal to the blue very, very close to the yellow dot throughout the shortest term blue, so the banks will continue to make money, they will continue to provide this service that is turning government treasury bills into something that is not very useful for paying your morning coffee into something that you can use to do payroll and if you want coffee and that's known as narrow banking, you know you have a bank where the bank is going to be very focused on creating money through backing deposits and will always back them with the government, uh, with short-term government securities where you don't have to worry about them losing value, they don't move much when interest rates change, okay, going back to our balance sheet now you can see what that would look like is even simpler than the balance sheet we originally started with what would be the problem with this what has disappeared from the balance sheet we had before the main thing that is gone the most important thing that is No more loans, who in this economy makes the loans?

Who will make sure small businesses get loans and mortgages are paid? Now you could say, well, I thought there are a lot of non-bank entities that are involved in those things. There are very few of them that operate totally independently of the banking system, the core of what funds a lot of that is still deposits, to the extent that your economy needs to have long-term loans and, frankly, most of the things that give The value of us takes a while to materialize on one side of the balance sheet and on the other side of the balance sheet, people need to get their money quickly, so something that is very short term, like deposits, if your entire economy of somehow you need to do it.

Making sure the things we call banks aren't where they're happening doesn't mean you eliminate the risk of your overall economy collapsing when you suddenly can't pay for long-term things with short-term things. in fact, one can think of the global financial crisis as essentially what happened in the global financial crisis, if you remember the names of that era, names like Lehman Brothers and Bear Stearns and AIG, the big bankruptcies and Neil's bankruptcies were not banks, they were not banks. They didn't actually have deposits, but they were involved in ways of doing the kinds of things that banks did, but without deposits you do create a world where banks are super safe because they're not doing any of this transforming things.

From long term to short term and vice versa, some other institution will do it and we would be fooling ourselves if we thought that we have fixed the banking system or the financial system by making sure that the banks themselves, what we call in English banks, do not do it. We don't have this problem because the problem would migrate. The ultimate cause of this is something that is fundamental to capitalism and it is the things that give us value, whether it is our education or our house that we live in for a very long period of time or the crops that we plant or the research and The development of a New Medicine takes a long time and many of them are uncertain and what we need every day is to be able to pay for our food and then what the financial system effectively does is transform claims on all those things in the long term in a very complex way. so that we have something called money that we can use in the economy, making sure that that doesn't happen in a very specific place or another specific place, it doesn't eliminate the need for it to happen somewhere in the foreign financial system, the big question is ifWe are going to have a system that looks like what we have now with something that looks like banks, what should we do to try to prevent this from happening again? and here the answer gets a little more complicated as ultimately we are trying to do this Alchemy of taking something that is long term and allowing us to have short term deposits and rights to that thing long term if we are going to do that, ultimately we're always going to have some kind of risk in the system that maybe there's not enough money to pay us back here the typical way this is handled and I think that's the right solution, we just have to do the best we can. that we can, try to make it work technically as best as possible, the typical solution is to go back to the balance sheet, so we look at the balance sheet here and look at where we were for Silicon Valley Bank on December 31, 2022, where they had 15 billion of capital and that 15 billion of capital were below 212 billion of assets, so the first thing we do is say: I want to make sure that it's really 15. or maybe I want it to be even more than 15.

Okay, that's called capital regulation. capital and you will hear a lot about this in the coming months and if you may be seeing this in the next few years, I am sure that people will continue to talk about it, which One way to make the bank safer is to make sure that have more capital in relation to each unit of asset you have, which would give you more protection. If we think about why we had a problem here, the value of our assets fell. and it fell enough to wipe out all the capital, so why not have more?

A complicated question there is why not have much more. Wow, if 15 were eliminated maybe we should go to 30 and for the Somehow, maybe we should get to 100. What if half of this was equity? Unfortunately, it's a more complicated question than I can answer in this six-minute period. Suffice it to say that the main problem, the main challenge, is that if you tell a specific bank that it has to have a lot of capital, ultimately where that comes from is deposits, so if you look at this balance sheet here and you say you should have to back this same amount of assets, half the capital, that means It would be a lot less in terms of deposits and remember deposits are how they make money, one of the main ways they make money, so What if I told the bank that they can't do that.

As much as you were doing it, it is a problem and banks do not have the monopoly to do it, other types of financial institutions can do things that look like this and banks sometimes they end up getting kicked out of business, so that's the problem is making it incredibly high, but could it be higher? Could we be much more careful in how we calculate it? We could be more aware, I'm sure we can. The other thing people pay attention to is how much they remember what actually sticks. The solvent in a market sense is the value of that deposit franchise, the fact that people are willing to leave their deposits there, so the other types of requirements that we try to achieve are things that try to address how sticky they are those deposits. how valuable that franchise is and how likely it is that it will disappear and those are generally called liquidity requirements and they are relatively new, we didn't have them in the same formal way that we have them today until after the global financial crisis and so on. to some extent, there is still a work in progress, and they can and probably could be improved so that they work better with the capital requirements, but what we discussed above thinks it's really important to note that if we knew everything that We needed to know about how to make this system safe, it would probably still be true that from time to time we would have bank failures and even then we would occasionally have bank failures that would become contagious.

Why is the financial system ultimately a machine that converts our short-term savings into long-term investments and the Machine itself will have this inherent risk that there are no short-term things that you can demand tomorrow and they will simply grow in the trees we have. build it and we can make that system very, very secure, but there will be some cost to its ability to function. It's the same problem we have with almost anything in our society, where there is a balance between safety and efficiency, it remains the same. caves in the city where I live and maybe where you are too, that we have too many traffic deaths, too many people in and out of cars who are harmed by cars, we could greatly reduce them by lowering all traffic limits. speed at three miles per hour. and have incredibly high penalties if you get caught speeding, which will greatly reduce all the traffic deaths we have with obvious costs to efficiency in the banking system, it's harder to see those connections, but they are there, It is the case that when we decide to push very hard in one direction to make a part safer two things happen the activity itself that we have made safe on a road by changing the speed limit moves to another road if we can find all the roads in where people are and change all those speed limits now that we're in a place where it's really hard to get anywhere and that's an inextricable problem with having a financial system, so the second part of what we need to do is Not only do we have to do the best we can to make sure our financial paths are safe, but we also have to think very carefully about how we are going to deal with the system when it occasionally fails, knowing that that is something that is just part of how it is set up. the financial system in this module we discuss the failure of the Silicon Valley Bank a very instructive case to understand banking and bailouts nice and simple if you want to go deeper and understand very complicated cases in banking and bailouts I invite you to study the global financial crisis of 2007 to 2009. thank you