Bond Funds in the Aftermath of SVB’s Collapse
![Decorative image: Bond market screen with rising yields and interest rates](https://libertystreeteconomics.newyorkfed.org/wp-content/uploads/sites/2/2023/11/LSE_2023_fed-fund-post-svb_cetorelli_460.jpg?w=920)
March 2023 will rightfully be remembered as a period of major turmoil for the U.S. banking industry. In this post, we go beyond banks to analyze how fixed-income, open-end funds (bond funds) fared in the days after the start of the banking crisis. We find that bond funds experienced net outflows each day for almost three weeks after the run on Silicon Valley Bank (SVB), and that these outflows were experienced diffusely across the entire segment. Our preliminary evidence suggests that the outflows from bond funds may have been an unintended consequence of the exceptional measures taken to strengthen the balance sheet of banks during this time.
Mitigating the Risk of Runs on Uninsured Deposits: the Minimum Balance at Risk
![Decorative image: SANTA CLARA, CALIFORNIA - MARCH 13: Members of the media line up outside of a Silicon Valley Bank office on March 13, 2023 in Santa Clara, California. Days after Silicon Valley Bank collapsed, customers are lining up to try and retrieve their funds from the failed bank. The Silicon Valley Bank failure is the second largest in U.S. history. (Photo by Justin Sullivan/Getty Images)](https://libertystreeteconomics.newyorkfed.org/wp-content/uploads/sites/2/2023/04/LSE_2023_MBR_cipriani_460.jpg?w=920)
The incentives that drive bank runs have been well understood since the seminal work of Nobel laureates Douglas Diamond and Philip Dybvig (1983). When a bank is suspected to be insolvent, early withdrawers can get the full value of their deposits. If and when the bank runs out of funds, however, the bank cannot pay remaining depositors. As a result, all depositors have an incentive to run. The failures of Silicon Valley Bank and Signature Bank remind us that these incentives are still present for uninsured depositors, that is, those whose bank deposits are larger than deposit insurance limits. In this post, we discuss a policy proposal to reduce uninsured depositors’ incentives to run.