Larry Summers dismisses systemic risk of SVB failure—as long as depositors are protected

“What is absolutely imperative is that, however this gets resolved, depositors be paid back, and paid back in full,” Summers said on Bloomberg Television’s “Wall Street Week” with David Westin. And as long as that’s the case, while there will be risks to banks’ asset values, “I don’t see — if this is handled reasonably, and I have every reason to think that it will be — that this will be a source of systemic risk,” he said.

SVB’s stock was decimated after the California bank holding company moved to bolster its capital position after a significant loss on its investment portfolio. That also triggered a broader selloff in US lenders, which sank Thursday by the most in almost three years.

“You saw substantial moves even in the country’s largest banks in their stock prices,” noted Summers, a Harvard University professor and paid contributor to Bloomberg Television. “I think there may well be an element of overreaction in that.”

Summers said there’s no aspect of the recent developments that would call into question the idea that depositors will be repaid.

Bank Mergers

SVB’s crisis has spurred broader concern about a mis-match between banks’ funding costs and the rates they earn on their assets. The Federal Reserve’s steep interest-rate hikes over the past year have forced banks to pay out more to depositors, while they are receiving lower rates on some of their longer-dated assets.

“There are going to be issues here for regulators to look at,” he also said. “In general, bank accounting probably doesn’t fully capture some of the risks associated with this pattern of borrowing short and lending long.”

Summers said that “there may be a need for some consolidation” in the banking sector as a result of the latest developments. That could then pose a test for regulators, he said.

A number of Democrats have pushed to limit bank mergers. For example, Senate Banking Committee Chair Sherrod Brown last year called for “ensuring that bank mergers, if approved, serve American families, small businesses, and communities – not Wall Street and big corporations.”

Summers warned that “one of the mistakes the authorities could make would be — out of a fear of consolidation coming from some kind of populist concern about concentration — blocking combinations that would ultimately operate in the direction of financial stability.”

“That’s something I think that we’re going to need to be attentive to going forward,” the former Treasury chief said.