Odd Lots The Quiet Revolution in How We Rescue Banks
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Feb 15, 2024 In this discussion, Steven Kelly, an expert in emergency lending at Yale, illuminates the evolving landscape of bank rescue strategies post-2008. He delves into the recent banking crisis sparked by Silicon Valley Bank, emphasizing the role of the Federal Reserve's discount window and new liquidity programs. Kelly proposes innovative reforms to enhance emergency financing and highlights the importance of pre-positioning collateral. His insights shed light on the delicate balance between maintaining liquidity and managing market perceptions.
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Discount Window Limitations
- The discount window helps with macro issues and contagion, not individual bank failures.
- Banks in the headlines face reputational damage that money alone can't fix.
SVB's Failed Capital Raise
- SVB's attempt to raise capital backfired when investors saw they needed $2.25B, triggering a loss of confidence.
- If a strong investor like Warren Buffet had stepped in, SVB might have survived.
FHLBs vs. Discount Window
- Instead of the discount window, SVB relied on Federal Home Loan Banks (FHLBs), a common practice.
- FHLBs work for smaller amounts but can't handle large-scale liquidity needs like SVB's $40B shortfall.