Is There a Contradiction Between Inflation Management and Financial Stability?

Last week, California-based Silicon Valley Bank, the 16th largest bank in the United States, collapsed, sending shock waves through the start-up universe. Then two more banks – the crypto-currency focussed Signature Bank and Silvergate Capital – shut down, sparking fears of wider financial contagion, similar to how the collapse of Lehman Brothers in 2008 triggered a global crisis.

The American government and the Federal Reserve acted fast to try and avoid precisely such a scenario by announcing measures aimed at boosting confidence in the banking system. The Biden administration has announced that all the depositors’ savings in the Silicon Valley Bank will be protected, including those deposits over and above the sums that are insured. The Federal Reserve, on its part, has unveiled a new lending program called the Bank Term Funding Program (BTFP), which would enable banks to borrow directly from the central bank instead of having to resort to loss-making bond sales, as the Silicon Valley Bank did.

So, what caused the collapse of the Silicon Valley Bank? Could it have been prevented? Is this banking collapse something that can be contained, or is it a harbinger of more such failures in the pipeline?

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