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Discussion Paper
Bond Funds in the Aftermath of SVB’s Collapse
March 2023 will rightfully be remembered as a period of major turmoil for the U.S. banking industry. In this post, we go beyond banks to analyze how fixed-income, open-end funds (bond funds) fared in the days after the start of the banking crisis. We find that bond funds experienced net outflows each day for almost three weeks after the run on Silicon Valley Bank (SVB), and that these outflows were experienced diffusely across the entire segment. Our preliminary evidence suggests that the outflows from bond funds may have been an unintended consequence of the exceptional measures taken to ...
Speech
Building Financial System Resilience
To conclude, a resilient financial system plays an important role in ensuring a strong economy. After the global financial crisis, steps were taken to shore up the resilience of the banking system. Systemically important banking institutions have higher capital and liquidity buffers and better risk-management systems than they did. The sound banking system was able to lend important support to households and businesses throughout the pandemic. But the financial system is dynamic, with new products, business models, and technologies being introduced, and the economic environment can change ...
Journal Article
The Failure of the Bank of the Commonwealth: An Early Example of Interest Rate Risk
This Economic Commentary describes the collapse and subsequent bailout of the Detroit-headquartered Bank of the Commonwealth in 1972. Commonwealth failed because it invested heavily in long-duration, fixed-rate municipal securities in the mid-1960s in a bet that interest rates would decline. Instead, with the beginning of the Great Inflation of 1965–1980, rates rose. Liquidity problems then ensued, and the bank approached failure. Unable to find an acquirer because of Michigan’s banking restrictions, regulators instead bailed out the bank because of fears of contagion. This article also ...
Discussion Paper
A Retrospective on the Life Insurance Sector after the Failure of Silicon Valley Bank
Following the Silicon Valley Bank collapse, the stock prices of U.S banks fell amid concerns about the exposure of the banking sector to interest rate risk. Thus, between March 8 and March 15, 2023, the S&P 500 Bank index dropped 12.8 percent relative to S&P 500 returns (see right panel of the chart below). The stock prices of insurance companies tumbled as well, with the S&P 500 Insurance index losing 6.4 percent relative to S&P 500 returns over the same time interval (see the center panel below). Yet, insurance companies’ direct exposure to the three failed banks (Silicon Valley Bank, ...