Problem Set 18

The speed of SVB's collapse was driven mainly by inadequate capital levels.

FALSE

SVB's regulatory capital ratios looked sound up to the week it failed; the collapse was driven by an abrupt loss of depositor confidence once large uninsured clients doubted the bank's liquidity. The run drained $42 billion in a single day, a scale no capital buffer could absorb. The issue was speed and trust, not initial capital adequacy.

SVB's $1.8bln loss disclosed in March 2023 came from selling AFS securities that hadfallen in value due to rising rates.

TRUE

The reported $1.8 billion loss on March 8 2023 came from selling part of the AFS securities portfolio, which had lost value as the Fed raised rates. Those realized losses publicly revealed a problem that had existed in unrealized form for months ,triggering the confidence shock that set the run in motion

At SVB in March 2023, the equity-raise announcement successfully reassured marketsand stabilized deposits.

FALSE

The equity-raise announcement backfired immediately. Rather than restoring confidence, it signaled distress to investors and depositors, leading venture-capital firms to warn their portfolio companies to withdraw funds. Within 24 hours, liquidity evaporated.

Regulators' decision to guarantee all deposits at SVB and Signature in 2023 createda precedent that some view as moral hazard.

TRUE

Guaranteeing all deposits at SVB and Signature stopped further runs but blurred the line between systemic protection and moral hazard. The policy reassured depositors system-wide but also implied that large, uninsured accounts could expect future rescue—undermining the discipline depositors usually impose.

The Bank Term Funding Program (BTFP) allowed banks to borrow from the Fed at marketvalue, forcing them to realize losses on their securities.

FALSE

The Bank Term Funding Program (BTFP) allowed banks to borrow from the Fed at par value of Treasuries or MBS, preventing forced sales at losses. Its purpose was to ease liquidity stress, not to crystallize losses. In effect, it postponed recognition of unrealized losses while restoring short-term stability.

In 2023 regarding SVB, the speed of information sharing through digital channelsamplified what would otherwise have been a slow, localized run.

TRUE

Digital coordination via group chats and social media accelerated withdrawals from days to hours. The same network effects that once fueled tech growth amplified panic, creating the first truly digital bank run. This speed overwhelmed supervisory playbooks built for slower contagion.

Prior to 2023, duration risk in SVB's balance sheet was visible in regulatory filingsbut was largely ignored by analysts and supervisors.

TRUE

SVB's quarterly filings disclosed duration exposure and unrealized losses, but investors, analysts, and regulators underweighted them because ratios remained compliant. Familiarity with SVB's brand and clientele produced complacency—seeing data was not the same as interpreting it correctly.

SVB's "held-to-maturity" classification meant unrealized losses immediately reduced Tier 1 capital.

FALSE

The HTM classification insulated those securities from fair-value changes in Tier 1 capital. Losses were recorded only in footnotes, not through earnings or capital ratios, allowing SVB to appear solvent even as the market value of equity eroded.

The 2018 regulatory rollback contributed to lighter oversight of mid-size banks likeSVB.

TRUE

The 2018 regulatory rollback lifted enhanced-supervision thresholds to $250 billion, removing liquidity-coverage and stress-testing requirements from banks like SVB. That exemption delayed supervisory detection of interest-rate and concentration risks.

Between 2020 and 2023, the Fed's rapid tightening cycle transformed an accountingissue into a liquidity crisis.

TRUE

The Fed's rapid tightening turned unrealized accounting losses into a liquidity crisis once depositors began withdrawing. Rising rates devalued assets, reducing usable collateral, while simultaneous deposit flight forced sales at a loss—an interest-rate shock became a solvency concern.

Including AOCI in Tier 1 capital for all banks would have revealed SVB's weakness earlier but could also have induced market overreaction.

TRUE

If AOCI had been included in Tier 1 capital, SVB's reported capital would have declined sharply in 2022, likely prompting earlier regulatory or market action. However, that transparency might also have provoked panic before management could recapitalize—highlighting the trade-off between realism and stability.

SVB's collapse led to no significant policy or supervisory changes in the U.S. bankingsystem.

FALSE

The SVB episode produced significant policy responses: creation of the BTFP, Fed reviews of supervision, tougher mid-size-bank liquidity rules, and global reconsideration of interest-rate-risk oversight. It became a catalyst for regulatory recalibration, not inertia.

The primary trigger for SVB's March 2023 run was

a public announcement of losses and an equity raise

Which characteristic most amplified SVB's vulnerability to a confidence shock

homogeneous uninsured depositor base

Under regulatory capital rules for mid-size U.S. banks, AOCI was

excluded, hiding unrealized bond losses

Which statement best describes the purpose of the BTFP

to allow banks to borrow at par against safe collateral

The CRO vacancy at SVB illustrates

a breakdown in basic governance and accountability

Which factor most distinguishes the SVB run from historical precedents

use of social-media networks and digital withdrawals

When regulators guaranteed all deposits, their immediate objective was

to prevent contagion and systemic runs

What accounting treatment created the "stable on paper" illusion

HTM classification excluding fair-value changes from capital

Which actor's failure most directly delayed recognition of SVB's risk exposure

the Federal Reserve's supervisory function

A key behavioral factor that limited early intervention was

groupthink and confirmation bias

Which policy debate emerged directly after the collapse

expansion of deposit insurance and inclusion of AOCI in capital

In hindsight, SVB's downfall demonstrates that

traditional asset-liability mismatch remains lethal in a digital era