CASI Faculty Co-Director Anat Admati on the Recent Bank Failures and What Went Wrong
Below is a partial list of media publications, interviews, and audio excerpts featuring CASI faculty co-director Anat Admati on the recent banking crisis, the economic risks posed to the global banking system, and what it may mean for the future.
The Real Threat to Stability is Not From Bank Runs
Anat Admati, Martin Hellwig, Richard Portes Financial Times 05/19/2023
Mervyn King’s proposal for guaranteeing liquidity provision to financial intermediaries merits serious consideration (“We need a new approach to bank regulation”, Opinion, FT Weekend, May 13). But the former governor of the Bank of England’s suggestion diverts attention from the insolvency underlying what he calls “another crisis of confidence in banks”.
When Will They Ever learn? The US Banking Crisis of 2023
Anat Admati, Martin Hellwig, Richard Portes, VoxEU 05/18/2023
The crisis in US banking is ‘systemic’, concerning a large part of the banking system not because banks are so interconnected but because they have followed similar strategies and are now in a similar bind. SVB is an extreme example, but the difficulties of SVB suggest lessons about other banks in the US and elsewhere.
JP Morgan: Has World’s Largest Bank Got Too Big for its Boots?
The Week (UK) 05/12/2023
Thanks to accounting quirks, JPM booked a $2.6bn gain from the acquisition of First Republic. And there are plenty of critics of the rescue deal. Such deals are “the easiest way to deal with immediate issues”, says the Stanford University economist Anat Admati. But in the longer term, they perpetuate a tendency to “kick cans down the road” that has long plagued the banking sector.
Credit Suisse: Too Big to Manage, too Big to Resolve, or Simply Too Big?
Anat Admati, Martin Hellwig, Richard Portes, VoxEU 05/08/2023
In the aftermath of the runs on SVB and Credit Suisse, many have called to stabilise banks by extending the coverage of deposit insurance and other government guarantees. Similar calls were made during the 2007-2009 crisis and again during the Covid crisis starting March 2020. Government guarantees and other supports expanded greatly in these crises already. Calls to expand government guarantees are misguided.
There Was Really Just One Bank That Could Rescue First Republic
Bloomberg Businessweek 05/04/2023
Anat Admati, a professor at Stanford University’s Graduate School of Business, worries that banks in general tend to take too much risk and that large ones are hard to discipline, since allowing them to fail could wreak havoc. The First Republic deal, she says, “may have been the easiest way to deal with the immediate issues and minimize the cost to FDIC and indirectly to society, but longer term it perpetuates the tendency to always kick cans down the road that plagues the banking sector and its regulators.”
The Federal Reserve Blames itself for the Silicon Valley Bank Collapse
KCBS Radio 04/28/2023
Holly Quan spoke with Anat Admati, Professor of Finance and Economics at Stanford, and senior fellow at Stanford Institute for Economic Policy Research.
“Because they [the Fed] are maintaining the banking system with all kinds of supports, we don’t even know how many more failures or potential failures there are. I don’t want to create any panic. I’m just saying they have allowed a lot of weakness in the banking system as they’ve raised interest rates.”
“The regulators fail repeatedly. In that sense this is not so unusual. I’ve had this view since 2008 that structural regulation is flawed and the banking system is very unsafe, it’s just that we don’t see it until something like this happens, something triggers a shock to the fragile system.”
Can Apple Really Help Fix Banking?
Rana Foroohar, Financial Times Opinion 04/23/2023
Stanford professor Anat Admati, who has long called for higher levels of equity funding of banks, says: “Bank CEOs sometimes forget that depositors are creditors because depositors don’t behave like normal creditors, instead trusting deposit insurance, and maybe regulators, to make sure they will be paid. Non-banks wouldn’t dream of, and wouldn’t even be able to, fund their business with so much debt and so little equity.”
Safer Banks – Scientists Also Call for More Equity for Banks – News
SRF News (German-language Swiss broadcasting company) April 12, 2023
Anat Admati, economist and professor at the Stanford Graduate School of Business in California, finds an equity ratio of between 20 and 30 percent of the balance sheet total to be appropriate: “If the banks had more equity, they would be much more stable in a weak phase. Equity is not suddenly gone. You would have more time to react,” she says.
In such phases, banks are no longer allowed to pay dividends, according to Admati. The dividends reduce the equity again. In a phase in which interest rates are rising and the economy is slowing down, this is absurd.
Das Problem mit den Banken: Die Abwicklungspläne sind eine der grössten Lügen
Headline translation: The Problem With the Banks: “The Resolution Plans are One of the Biggest Lies”
Woz 04/06/2023 Swiss German-language weekly newspaper, published in Zürich.
Stanford economist Anat Admati is perhaps the world's most sought-after expert on banking regulation. She considers the new, huge UBS to be highly dangerous for Switzerland.
Regulators Created Wasteful Rules for Banks: Admati
Bloomberg Television, Wall Street Week. 04/03/2023
David Westin and Romaine Bostick interview Stanford Graduate School of Business Professor Anat Admati on "Wall Street Week Daily." (Source: Bloomberg)
Admati: “They [the regulators] did stuff that didn’t involve really looking at what was actually wrong and how best to fix it ... so they created a lot of rules that are not very cost beneficial, they’re wasteful and don’t very much for you. It takes a lot of time for the banks, a lot of time for the regulators. Instead of going for the simplest, most direct way to reduce the fragility of the system, which of course, first and foremost, has to do with reducing the amount of indebtedness and leverage in the system, at the individual level and the global level, that there are less IOUs.”
“It’s always an issue of leverage because if Silicon Valley Bank had a lot more ability to absorb losses, then they would be able to absorb those losses. And where does the ability to absorb those losses come from, if not from investors like every other company that lives not on the edge like that.”
“Everybody is saying the global world needs global banks. They say banks live globally and die locally. It’s not at all clear that we need the same corporation, and this was clear in Lehman Brothers bankruptcy, too, because the corporation as a whole can move the money across jurisdictions and then when somebody has to take over in a resolution, then you’re in that jurisdiction. They talk about single point of entry but it’s not working.”
Post-2008 Reforms Didn’t Solve the Problem of ‘Too Big to Fail’ Banks
CNN Business 03/31/2023
Yet, when several lenders got into trouble this month, regulators “didn’t use the mechanisms they promised us would work,” said Anat Admati, a finance and economics professor at Stanford Graduate School of Business. “Too big to fail is still a problem. It never got solved.”
De weg uit de financiële crisis (The way out of the financial crisis)
Sustainable Finance Lab #2, Pakhuis de Zwijger 03/30/2023
From the US, Anat Admati (professor of Stanford) will report on the latest state of affairs in the US and why it is important that the recommendations from her bestseller 'The Bankers New Clothes' are followed this time.
Executive Pay at Silicon Valley Bank Soared After Big Bet on Riskier Assets
Financial Times 03/24/2023
Anat Admati, a professor at the Stanford Graduate School of Business, who has researched the link between RoE an d pay, said linking bonuses to the metric was an “inducement to take risk.”
Banks Must Work to Avoid Risks of a Financial Meltdown
Adam Creighton, The Australian 03/25/2023
“A good analogy is that banks were going 97 miles an hour in a residential area (before the GFC) and now they are going 94 miles; it’s not a meaningful change,” Anat Admati, Stanford professor of finance and a global authority on bank regulation, tells Inquirer.
“Many insolvent institutions were allowed to persist. Everyone pretended they were ok and they didn’t default, but meanwhile they were incredibly reckless and ultimately collapsed and caused much harm,” she recalls.
“Unlimited deposit insurance is a very dangerous situation; more people will be doing what they are doing now,” Admati says, referring to the fact, for bank managers, it can pay to be negligent under the current regime.
“The focus should be on prevention instead of a cure in the form of bailouts,” says Admati.
(no link available)
Guaranteeing Bank Deposits: Talking with Professor Anat Admati of the Stanford Graduate School of Business
The San Francisco Experience podcast 03/22/2023
Anat Admati: “We really have to get away from this fascination with runs and panics because it was a run and a panic, but there was a completely legitimate concern with the bank’s solvency. The bank was insolvent. That is what started the run, it wasn’t the other way around."
“In the movies, in “It’s A Wonderful Life” and “Mary Poppins”, a rumor can lead to the failure of a healthy bank. That is not the case here. The bank was bust for a year.”
The Fed’s Unpleasant Choice
David Leonhardt/The Morning Newsletter, New York Times 03/22/2023
“Nobody is as privileged in the entire economy,” Anat Admati, a finance professor at Stanford University’s business school, told me.
There’s No Shortage of Ideas for How to Put Bank Crises Behind Us
Peter Coy, Economics writer, New York Times Opinion 03/22/2023
Anat Admati, a finance and economics professor at Stanford University’s Graduate School of Business, has argued for years that banks are getting away with murder by relying almost entirely on money from depositors and lenders to take risks and make profits. When an investment or loan makes money, the bank and its shareholders keep the upside. If enough investments and loans go bad — whoops — the shareholders don’t lose very much, because they didn’t put in very much in the first place and they can walk away if the bank becomes insolvent. The government often steps in to pick up the pieces: Privatized gains, socialized losses.
Mortgages, Wine and Renovations: Silicon Valley Bank’s Deep Tech Ties
New York Times 03/17/2023
“There were a lot of ways in which Silicon Valley Bank was intertwined in the lives of Silicon Valley people that was unique,” said Anat Admati, a professor of finance at Stanford. “The bank had relationships and made relationships with people across Silicon Valley. It was a point of congregation.”
SVB Had Close Financial Ties With Al Gore’s Venture Capital Firm
Daily Caller 03/17/2023
“There were a lot of ways in which Silicon Valley Bank was intertwined in the lives of Silicon Valley people that was unique,” Anat Admati, a Stanford finance professor, told the NYT. “The bank had relationships and made relationships with people across Silicon Valley. It was a point of congregation.”
Experts Discuss the State of U.S. Banking After the Silicon Valley Bank Collapse
Insights by Stanford Business 03/15/2023
Anat Admati: “The mortgage crisis in 2008 was mostly about credit risk, bad mortgages, and, well, also some deception. Silicon Valley Bank’s losses had more to do with interest rate increases. The bank invested quite a bit of money in long-term government bonds that are safe in the sense that they won’t default. But when interest rates increase, the value of such bonds declines, and the longer the maturity, the more bonds are affected by interest rate changes. When I taught basic finance courses, we covered this material routinely.”
How to Make This the Last Banking Bailout
New York Times Editorial Board 03/14/2023
“They should have stopped them months ago,” said Anat Admati, a finance professor at Stanford University. “That’s my problem with the Fed: If they were honest, they would admit their own mistakes.”
Is this a Banking Crisis? What to Know About the Silicon Valley Bank Collapse
“When the bank started selling the assets, it became more evidence of the value that they'd lost," Anat Admati, a professor at Stanford's Graduate School of Business, told ABC News.
“Imagine that your entire assets are your house and you bought the house with very little down payment and housing prices go down,” Admati added. "You're basically under water, meaning if you sell the assets, you can't pay your debt.”
Here's What to Know if You're Worried About Whether Your Money Is Safe in the Bank
“The problem is that people start inferring that something’s wrong with other banks,” says Anat Admati, professor of finance and economics at Stanford University. “They lose confidence in the system. It’s a domino effect.”
Silicon Valley Bank's Demise Impacts SF Housing Projects
Stanford Professor of Finance and Economics Anat Admati says SVB officials and regulators are to blame.
“The question is who's going to make sure you don't take too much risk relative to the equity that you have,” said Admati.
“They should monitor the funding mix. How much equity and how much debt they have," said Professor Admati, "If you have enough equity then you can take risk with it, because the risk is the shareholders. ”
“What you might have at other banks is there are more losses than the system is recognizing and that should be dealt with before another disaster comes,” said Admati.
Silicon Valley Bank’s Three Fatal Flaws
National Public Radio (NPR) 03/13/2023
Anat Admati is a finance and economics professor at Stanford University.
“They really exploded, in terms of there was just a lot of action in Silicon Valley - all kinds of startups - so the bank grew a lot.”
“People are not trusting that that system is safe, and that's actually right. The system is not safe. That's the reality we have to face.”
Government Takes Steps to Shore Up Confidence After Collapse of Two Banks Sparks Fears
PBS NewsHour 03/13/2023
Anat Admati: “Right now, there's too little care about the downside in the private sector. And when the downside comes, then they go running to the government."
“… the key to all of it is effective regulation. And we just didn't have that.”
“… the tech sector got saved because they wanted to make payroll, and the government didn't want panic. So they, kind of, could breathe a little easier in terms of their deposits.”
“The tech sector funds itself in all kinds of ways. A bank is not usually the way they fund themselves. They go to venture capital. They fund themselves in other ways. So, the tech sector has its own problems right now, the crypto turmoil, all kinds of other things. But, I mean, this banking part of it is just a wakeup call on the fragility of banking, basically. And the bank couldn't raise equity. That was a huge flag. That means that they were too deep in the hole by that time. It was for the regulators and for the supervisors to know that that was really an accident waiting to happen.”
People Nervous About National Bank Stability as Silicon Valley Banks Closes
KCBS Radio 03/13/2023
“There’s this myth going around that nobody is too big to fail and you can always just arrange any kind of a failure over a weekend and sure enough, it’s not true, because over the weekend, they tried to sell Silicon Valley Bank and they said well it was too difficult because it’s hard to value the assets for any buyer of something like that.”
“I don’t know if anyone will buy any portions of the assets or the whole thing of the US Silicon Valley Bank, but we’ll see.”
What the Collapse of Silicon Valley Banks Says About the Stability of U.S. Banks
National Public Radio (NPR) 03/12/2023
Anat Admati: “Basically, there are two main things here. One is the fact that inflation picked up, and the Federal Reserve started increasing interest rates. And when you increase interest rates, all kinds of things start happening in banking. And historically, it has often been the precursor of some trouble.”
“Basically, as interest rates go up, the value of previous promises to pay at lower interest rates go down. And so, a lot of banks, not just Silicon Valley Bank, have a lot of losses on the actual market value of their investments. Now, you might not see that change. It might be invisible to you because they're not selling it, so you don't see it, basically. And it became insolvent months ago. It just wasn't recognized as that.”
“There is trouble across the board. Right now, in December, the FDIC, the Federal Deposit Insurance Corporation, reported that across the banking system, there are $620 billion of what they call unrealized losses, in other words, losses that we're not seeing in their reports that the banks make. And that's up from eight billion the year before. So, it's more about seeing who's swimming naked. As Warren Buffett said, you know, when the tide goes down, you see who's swimming naked, so it's really about recognizing the weaknesses in time. And that is a job of the regulators.”
How to Understand the Problems at Silicon Valley Bank
Peter Coy, Economics writer, New York Times Opinion 03/10/2023
Anat Admati, a colleague of (Darrell) Duffie at Stanford, told me that banks would be less vulnerable to runs if they had thicker safety cushions of equity. That would mean less borrowing for any given level of assets, so that even if those assets lost a lot of value, they’d still be worth more than the liabilities.
“Being so heavily indebted, banks always want to benefit from magnified upside (juiced by leverage) and leave downside to others.”