Interest-Rate Risk and Runaway Deposits: Reassessing the March 2023 US Bank Failures

The failures in March 2023 can be better explained in terms of unfulfilled interest rate losses combined with the lack of runability in the deposit base and their extensive uninsured nature, as well as with regards to poor governance and supervision. The recent literature is unanimous that important risk exposures included uninsured deposits and risk to interest rates, but variable in scope on which banks were affected by the runs, and on whether the runs were fundamentally or panic-driven. If the vulnerability was not caused by one component alone, then “remedies” seem to be more likely to be effective if they improve the readiness of liquidity in addition to making changes to how capital is measured, and if they enhance the powers of supervisors to escalate cases. The predominant need for future research is the collection of causal empirical evidence of how the nature of regulation's tailoring and the nature of deposits affected banks' performance, to adjust regulatory reforms on the basis of a wider range of experience than the one in the current episode.

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