- Silicon Valley Bank's collapse highlights the long and variable lags of monetary policy and the importance of financial stability.
- The focus is shifting from inflation to financial stability, with the likelihood of a recession in 2023 increasing.
- Regional and small banks are likely to raise credit standards and restrict credit availability to avoid becoming targets.
- Tighter credit availability and economic slowing will affect the prices of assets used to underpin credit, putting stress on financial institutions.
- The distress in the banking system should tell the Fed they have accomplished what they set out to do in tightening financial conditions.
Lessons From SVB Have Echoes of a 1980s Bank Collapse
The bust of Silicon Valley Bank is the clearest demonstration that monetary policy indeed acts with long and variable lags. Risk assessment now has to include not just contagion to other banks, but also an understanding that higher rates have damaged balance sheets more than we thought. This has strong echoes of the early 1980s.
Edward Harrison
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