Reallocating Liquidity to Resolve a Crisis

Shortly after the collapse of Silicon Valley Bank (SVB) in March 2023, a consortium of eleven large U.S. financial institutions deposited $30 billion into First Republic Bank to bolster its liquidity and assuage panic among uninsured depositors. In the end, however, First Republic Bank did not survive, raising the question of whether a reallocation of liquidity among financial institutions can ever reduce the need for central bank balance sheet expansion in the fight against bank runs. We explore this question in this post, based on a recent working paper.
Historical Echoes: The Legacy of Freedman’s Savings and Trust

Freedman’s Savings and Trust Company, often referred to as the Freedman’s Bank, was created specifically for former slaves and African-American soldiers. It was established by legislation signed by Abraham Lincoln on March 3, 1865, only weeks before his assassination. Groundwork for the bank was laid during a meeting in January of that year by abolitionist preacher John Alvord, who met with a number of others to discuss the possibility of founding a system to assist freed African-Americans in their savings, financial development, and integration into American economic society. In the ten years of its existence, the Freedman’s Bank brought hope and then heartbreak to the African-American community.