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Silicon Valley Bank: A Case Study in Post-Crisis Bank Failures

Anthony J. Casey

Abstract

The 2023 Silicon Valley Bank collapse was the third-largest bank failure in United States (US)
history and one of the two largest since the 2008 financial crisis. This event served as the first
major test for the post-crisis bank-failure regime in the US. This article evaluates how effectively
that regime responded to the challenge. While some critics have questioned the effectiveness of
both the regime and the US government's specific actions, others argue that the measures taken
successfully mitigated systemic risk. Notably, the government felt compelled to provide
discretionary depositor protection beyond what the legal framework required. This suggests that
pre-established rules may be inadequate for managing bailouts and that a well-functioning bank-
rescue regime must account for the risk of abuse of discretion. The article concludes by
exploring potential mechanisms to mitigate such abuse.
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Silicon Valley Bank: A Case Study in Post-Crisis Bank Failures
Anthony J. Casey1*

The collapse and bailout of Silicon Valley Bank in March 2023 was swift and dramatic. Within a
few days of the public revelation of the bank’s troubles, state authorities and the Federal Deposit
Insurance Corporation (FDIC) placed the bank into receivership. In that period, the FDIC also
transferred Silicon Valley Bank’s assets to a bridge bank, and the United States government
announced a bailout guaranteeing all deposits. The collapses of Signature Bank and First
Republic Bank followed shortly thereafter. These three bank failures now mark the second, third,
and fourth largest in United States history2 and the only comparably large bank failures since the
2008 financial crisis.3

As such, the failure of Silicon Valley Bank provided the first post-crisis test of the United States
legal regime for dealing with major bank failures. The government’s response has been closely
scrutinized in the media and elsewhere. Federal Reserve Vice Chairman Michael Barr produced a
major report (the Barr Report) assessing the causes of the failure and the government’s
responses.4 The Federal Reserve’s Office of Inspector General also issued a report examining the
event (the OIG Report).5 Other groups — such as the Center for Financial Stability6 — have
produced their own assessments of the government’s role in handling the collapse.7 The FDIC’s
actions are also the subject of major litigation related to the bankruptcy of Silicon Valley
Financial Group — the holding company that owned Silicon Valley Bank.8

It is likely that this scrutiny will continue and will inform an ongoing debate — in the United
States and abroad — on the best practices for dealing with the resolution of failed and failing

*
Donald M. Ephraim, Professor of Law and Economics at the University of Chicago Law School, and
Faculty Director of the Center on Law and Finance. The Richard Weil Faculty Research Fund and the
Paul H. Leffmann Fund also provided generous support. I thank Benedict Bolton and Emma Lotts for
going above and beyond in their research assistance.
2
Since 2000 there have been 567 bank failures in the United States. Federal Deposit Insurance
Corporation, “Bank Failures in Brief – Summary” (2024), online: Federal Deposit Insurance Corporation
<https://www.fdic.gov/resources/resolutions/bank-failures/in-brief/index.html>.
3
Elizabeth Aldrich, “Failed Banks In The U.S.: An Analysis By Year, Size, and More” (29 April 2024),
online: Forbes <https://www.forbes.com/advisor/banking/list-of-failed-banks/>.
4
Michael S. Barr, “Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank”
(28 April 2023), online (pdf): Board of Governors of the Federal Reserve System
<https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf>.
5
Office of Inspector General, “Material Loss Review of Silicon Valley Bank” (25 September 2023),
online (pdf): Board of Governors of the Federal Reserve System
<https://oig.federalreserve.gov/reports/board-material-loss-review-silicon-valley-bank-sep2023.pdf>.
6
Sheila Bair et. al, “Supervision and Regulation after Silicon Valley Bank” (16 October 2023), online
(pdf): Center for Financial Stability
<https://centerforfinancialstability.org/research/CFSRegPaper101623.pdf>.
7
While these reports focused largely on the regulation of Silicon Valley Bank before its collapse, this case
study will focus on the how the bank resolution system functioned during and after the Bank’s collapse.
8
See, for example, SVB Fin. Grp. v. FDIC, 2024 U.S. Dist. LEXIS 8719 (United States District Court,
N.D. Cal.); see also In re SVB Financial Group, 2023 WL 8622521 (United States District Court, S.D.
New York).
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banks. In particular, because Silicon Valley Bank’s collapse occurred outside of a major
systemic crisis and arguably did not itself pose a systemic threat, it provides a case study for the
workings of resolution mechanisms for non-systemically important banks.

This article presents an early look at the case study, relying on the aforementioned reports and
available litigation documents related to the bankruptcy of Silicon Valley Financial Group.

1. BACKGROUND

Silicon Valley (SVB or the Bank) and Silicon Valley Bank Financial Group (SVBFG) — the
holding company that owned the Bank — were founded in 1983.9 The holding company went
public in 1988, and steadily grew over the following decades. It experienced growth and then
retraction in value during the late 1990s with the boom and bust of the dot-com sector.10 Then,
starting in 2019, it experienced a massive surge.11 As the Barr Report notes, Silicon Valley Bank
Financial Group “tripled in size” from the beginning of 2019 to the end of 2021.12 The low
interest rate environment during this time, along with increased market liquidity, led to large
growth in the number of deposits. Moreover, SVBFG and SVB outpaced other banks because of
SVB’s market concentration in the venture capital and start-up space.13

This chart from SVBFG’s financial highlights (reprinted in the Barr Report) provides a sense of
the SVBFG client base:

9
Barr, supra note 4 at 17.
10
Nathaniel Popper, “Silicon Valley Bank Strengthens Its Roots” (1 April 2015), online: The New York
Times <https://www.nytimes.com/2015/04/02/business/dealbook/silicon-valley-bank-strengthens-its-
roots.html>; see also Peter Sinton, “High Tech Bank Loves Start-Ups/Silicon Valley Bancshares make
money by serving young firms” (22 May 1995), online: SFGate
<https://www.sfgate.com/business/article/High-Tech-Bank-Loves-Startups-Silicon-Valley-3033000.php>.
11
Barr, supra note 4 at 19.
12
Ibid. at 18.
13
Ibid. at 18.
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To give a sense of the growth during this period, SVB held around $45 billion in deposits in
2017.14 By March 2022, that number had grown to over $200 billion.15

While SVBFG’s venture capital and start-up client base fueled its growth from 2019 through
2021, this client base had the opposite effect starting in 2022. The Barr Report notes, “In the
second half of 2022, VC activity fell sharply as part of a broader pullback in tech investment,
which was driven by lower investor risk appetite as interest rates rose and concerns about the
economy increased.”16 Put simply, as interest rates increased and funding for venture capital
clients decreased, SVB’s deposits diminished.

The crisis at the core of this case study arose from the combination of this reduction in deposits
and two additional factors: 1) during this time, SVBFG invested the Bank’s deposit funds in
long-term securities,17 and 2) an overwhelming majority of those deposits were uninsured.18 The
following figures from the Barr Report demonstrate the magnitude of these factors:

14
Office of Inspector General, supra note 5 at 9.
15
Ibid. at 9.
16
Barr, supra note 4 at 20.
17
Ibid. at 80.
18
Ibid. at 21.
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According to the Barr Report, SVBFG was an outlier regarding both factors, with a portfolio that
had double the held-to-maturity securities and double the uninsured deposits of average large
banks.19

19
Ibid. at 22.
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(a) Collapse in March 2023

This background set the stage for the March 2023 collapse. As interest rates rose and bond prices
fell in 2022, SVBFG’s investment portfolio started losing value.20 The market price of its long-
term securities was dropping precipitously as SVBFG experienced “a rapid increase in
unrealized losses on both its HTM and available-for-sale (AFS) portfolios.”21 At the same time,
deposit outflows at SVB were accelerating.22 SVB’s clients — who had previously operated in a
low-interest-rate, high-liquidity environment — were not adjusting to the new market. As their
ability to borrow decreased, these clients turned to their cash deposits to fund operations,
resulting in a significant outflow of deposits from SVB.23

As the outflow increased, SVBFG and SVB faced a liquidity crunch and encountered challenges
in funding client withdrawals. To meet these obligations, on 8 March 2023, SVBFG revealed its
Strategic Action Plan to sell a bundle of securities at a loss of $1.8 billion and to offer new equity
of $2.25 billion.24

Announcing this plan marked the beginning of the end for SVBFG as markets reacted quickly.
Investors and depositors alike correctly interpreted SVBFG’s actions as indicative of financial
distress and liquidity problems.25 The next day — 9 March 2023 — depositors increased their
withdrawals, and more than $40 billion flowed out of SVB.26

In a sign of changing times, the withdrawals were driven in large part by social media chatter
about SVB’s financial condition. The ubiquity of social media was a factor absent in pre-crisis
bank failures. But here, SVB’s liquidity concerns were instantly broadcast on a mass scale via
social media platforms like Twitter and TikTok.27 As the Barr Report noted, the flow of
information throughout the venture capital network resulted in investors withdrawing “their
deposits in a coordinated manner with unprecedented speed.”28 In this way, SVB is an example

20
Ibid. at 3 and 22.
21
Ibid. at 23.
22
Ibid. at 4 and 23.
23
Ibid. at 21 and 23.
24
Silicon Valley Bank, “Strategic Actions/Q1’23 Mid Quarter Update” (2023), online (pdf): Silicon Valley
Bank <https://s201.q4cdn.com/589201576/files/doc_downloads/2023/03/Q1-2023-Mid-Quarter-Update-
vFINAL3-030823.pdf>.
25
Barr, supra note 4 at 24.
26
Ibid.
27
Tony Cookson & Christoph Schiller, “Twitter played a role in the collapse of Silicon Valley Bank – new
research” (2 May 2023), online: The Conversation <https://theconversation.com/twitter-played-a-role-in-
the-collapse-of-silicon-valley-bank-new-research-204514>; Jennifer Korn, “SVB collapse was driven by
‘the first Twitter-fueled bank run’” (14 March 2023), online: CNN
<https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.html>.
28
Ibid. at 24.
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of a digital bank run, making it distinct from the 2008 crisis. It has even been categorized as the
first “bank sprint” of the digital era.29

(b) The Regulatory Response

At that point, SVBFG’s stock price was in free fall, and the Bank was facing an additional $100
billion in withdrawal requests the next day.30 Thus, the California Department of Financial
Protection and Innovation — the state’s banking authority — stepped in to close the bank and
appointed the FDIC as receiver.31 The FDIC moved quickly to transfer all deposits and assets to
Silicon Valley Bridge Bank, N.A. — a new entity created to serve as the bridge bank for the
resolution.32

It appeared the resolution would follow the statutory guidelines (outlined below), leaving
uninsured depositors — of whom there were many — to bear substantial losses.33 But both
mainstream34 and social media35 pressure emerged for the government to take action to protect
uninsured depositors. Hedge fund manager Bill Ackman went so far as to declare in a lengthy
tweet on 11 March, “The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake.”36

On 12 March, the Federal Government announced a rescue plan to protect all depositors.37
Whether this was a result of media or political pressure, agency influence, or earnest internal

29
Ken Sweet & Stan Choe, “How the digital era helped speed up bank runs” (15 March 2023), online:
PBS News <https://www.pbs.org/newshour/economy/bank-runs-used-to-be-slow-the-digital-era-has-sped-
things-up>.
30
Office of Inspector General, supra note 5 at 15.
31
Ibid. at 15.
32
In re SVB Financial Group, supra note 8, Declaration of William C. Kosturos In Support of the Debtors
Chapter 11 Decision and First Day Pleadings. Doc #21.
33
12 USC § 1823(c) (2024).
34
Peter Coy, “How to Understand the Problems at Silicon Valley Bank” (10 March 2023), online: The
New York Times <https://www.nytimes.com/2023/03/10/opinion/silicon-valley-bank-federal-
reserve.html?searchResultPosition=2>. Coy calls for regulator action: “To prevent a cascading financial
crisis, the F.D.I.C. could insure all of banks’ liabilities, including all deposits without limit, as it did
during the global financial crisis.” He also highlights potential action by the Fed: “Or maybe if more
banks get in trouble, the Fed might slow down its pace of rate increases”.
35
David Sacks, “Where is Powell?” (10 March 2023), online: X
<https://x.com/DavidSacks/status/1634292056821764099>; Eric Vishira, “If SVB depositors aren’t made
whole, then corporate boards will have to insist their companies use two or more of the BIG four banks
exclusively.” (10 March 2023), online: X < https://x.com/ericvishria/status/1634414149882232832>.
36
Bill Ackman, “The gov’t has about 48 hours to fix a-soon-to-be-irreversible mistake.” (11 March 2023),
online: X < https://x.com/BillAckman/status/1634564398919368704>; Jesse O’Neill, “Hedge fund
manager Bill Ackman warns of economic meltdown after Silicon Valley collapse” (12 March 2023),
online: New York Post <https://nypost.com/2023/03/12/bill-ackman-warns-of-economic-meltdown-amid-
silicon-valley-bank-
collapse/?utm_campaign=SocialFlow&utm_source=NYPTwitter&utm_medium=SocialFlow>.
37
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation &
Department of the Treasury, “Joint Statement by the Department of The Treasury, Federal Reserve, and
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White House deliberations is up for debate,38 as is the question whether the government’s action
counts as a “bailout.”39 While I fall on the side of calling it a bailout and will do so for the
remainder of this article,40 the label is only relevant for political scorekeeping.41 The important
fact is the Federal Government supported over $100 billion in uninsured deposits, rendering
them, as Michael Ohlrogge aptly puts it, “de facto insured.”42

In short, the United States Federal Government guaranteed all deposits. In a “Joint Statement,”
the Department of the Treasury, Federal Reserve, and FDIC (after “consulting with the
President”), announced, “Depositors will have access to all of their money starting Monday,
March 13.”43 The agencies added, “No losses associated with the resolution of Silicon Valley
Bank will be borne by the taxpayer.”44 That same day President Biden gave a speech assuring

FDIC” (12 March 2023), online: Federal Deposit Insurance Corporation

<https://www.fdic.gov/news/press-releases/2023/pr23017.html#> [Joint Statement].
38
According to one report,
Biden eventually came around to the view that an emergency rescue was the only viable option
after multiple briefings Friday through Sunday from chief of staff Jeff Zients and new National
Economic Council Director Lael Brainard, who just joined the White House after serving as vice
chair of the Fed and chair of the central bank’s Financial Stability Committee. He also spoke with
California Gov. Gavin Newsom on Saturday about SVB’s failure and its impact on the state.
Adam Cancryn, Ben White & Victoria Guida, “How Biden saved Silicon Valley startups: Inside the 72
hours that transformed U.S. banking” (13 March 2023), online: Politico
<https://www.politico.com/news/2023/03/13/the-emergency-bank-rescue-that-almost-didnt-happen-72-
hours-00086868>.
39
Peter Banker, “Don’t Call It a Bailout: Washington Is Haunted by the 2008 Financial Crisis” (14 March
2023), online: The New York Times <https://www.nytimes.com/2023/03/14/us/politics/bailout-biden-
financial-crisis.html>; Matt Stoller, “The Silicon Valley Bailout: What you need to know” (16 March
2023), online: American Economic Liberties Project <https://www.economicliberties.us/our-work/the-
silicon-valley-bank-bailout-what-you-need-to-know/>; Paige Smith, “What Constitutes a ‘Bailout’? Did
US Banks Get One?” (14 April 2023), online: Bloomberg
<https://www.bloomberg.com/news/articles/2023-04-14/what-is-a-bank-bailout-and-did-svb-or-signature-
get-one?embedded-checkout=true>; Editorial Board, “No One Should be Happy About these bank
‘bailouts’” (13 March 2023), online: The Washington Post
<https://www.washingtonpost.com/opinions/2023/03/13/silicon-valley-bank-bailout-response/>.
40
In a prior work, Eric Posner and I defined a bailout as “an ex post government transfer…to provide
capital that is otherwise unavailable because of liquidity constraints.” Anthony Casey & Eric Posner, “A
Framework for Bailout Regulation” (2016) 91:2 Notre Dame Law Review at 487. The rescue of SVB
depositors certainly fits that definition.
41
For what it is worth, my view is that the depositors were bailed out. It is true that the bank itself did not
receive funds. But there is no way around the fact that the depositors received government backing to
eliminate risks that were unprotected at the time of the deposits. (There is further litigation pending
regarding SVBFG’s rights as both equity holder and depositor.)
42
Michael Ohlrogge, “Why Have Uninsured Depositors Become De Facto Insured?” (15 November
2023), online: SSRN < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4624095>.
43
Joint Statement, supra 37 at note 37.
44
Ibid.
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Americans, “Your deposits are safe.”45 He added, “Let me also assure you we will not stop at
this; we’ll do whatever is needed.”46 The statement also extended the rescue plan to Signature
Bank and implied the government was ready to support deposits at other banks.47

While this case study focuses on Silicon Valley Bank, it is worth noting two other
contemporaneous bank failures. As the worry over Silicon Valley Bank progressed, withdrawals
at Signature Bank increased. Signature Bank, operating largely in the crypto space, similarly had
a large proportion of uninsured deposits.48 On 12 March, the New York State Department of
Financial Services closed Signature Bank and appointed the FDIC as receiver.49

Separately, First Republic Bank was experiencing its own problems, and on 1 May, the
California Department of Financial Protection and Innovation stepped in to close that bank as
well and appoint the FDIC as receiver.50

Together the failures of First Republic Bank, Silicon Valley Bank, and Signature Bank marked
the second, third, and fourth largest bank failures in United States history.51 The first largest
being the failure of Washington Mutual in 2008.52

45
Peter Baker, “Biden Assures Americans: ‘Our Banking System Is Safe’” (13 March 2023), online: The
New York Times <https://www.nytimes.com/2023/03/13/business/biden-assures-americans-our-banking-
system-is-safe.html>.
46
Ibid.
47
The statement added, “Finally, the Federal Reserve Board on Sunday announced it will make available
additional funding to eligible depository institutions to help assure banks have the ability to meet the
needs of all their depositors.” Ibid.; Lev Menand & Morgan Ricks, “Scrap the Bank Deposit Insurance
Limit” (15 March 2023), online: The Washington Post
<https://www.washingtonpost.com/opinions/2023/03/15/silicon-valley-bank-deposit-bailout> (“The
government is engaged in something of a dance, in which it formally caps insurance, only to waive the
cap when it actually matters, making it easier for large banks to escape from paying a fair price for their
public franchise.”).
48
Elizabeth Buchwald, “Signature Bank failed because of ’poor management,’ FDIC report finds” (28
April 2023), online: CNN <https://www.cnn.com/2023/04/28/business/signature-bank-fdic-
report/index.html>.
49
Federal Deposit Insurance Corporation, “FDIC Establishes Signature Bridge Bank, N.A., as Successor
to Signature Bank, New York, NY” (12 March 2023), online: Federal Deposit Insurance Corporation
<https://www.fdic.gov/news/press-releases/2023/pr23018.html> [Signature Bank].
50
Federal Deposit Insurance Corporation, “JP Morgan Chase Bank, National Association, Columbus,
Ohio Assumes All the Deposits of First Republic Bank, San Francisco, California” (1 May 2023), online:
Federal Deposit Insurance Corporation <https://fdic.gov/news/press-releases/2023/pr23034.html>.
51
First Republic was the second largest with $229 billion in assets, Ibid.; Silicon Valley Bank was third
with about $217 billion in assets, Barr, supra note 4 at 24; Signature bank was fourth with about $110.4
billion, Signature Bank, supra note 49.
52
Washington Mutual had about $307 billion in assets. Elinor Comlay & Jonathan Stempel, “WaMu is the
Largest U.S. Bank Failure” (26 September 2008), online: Reuters
<https://www.reuters.com/article/idUSTRE48P024/#:~:text=NEW%20YORK%2FWASHINGTON%20(
Reuters),littered%20with%20toxic%20mortgage%20debt>.
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2. THE LEGAL AUTHORITY AND THE FUNDING

(a) Legal Authority

In reviewing these events, two preliminary questions stand out: What legal authority did the
government use to implement this extreme rescue plan? And — if the necessary funds did not
come from taxpayers — where did they come from?

The first step in addressing these inquiries is to turn to the relevant legal structure found in 12
U.S.C. § 1823(c). The default rule is the FDIC can only provide funding as “necessary to meet
the obligations” for insured deposits.53 The statute further requires that the FDIC’s authority
must be exercised in the “least costly” way.54 The statute further adds that the FDIC cannot take
actions “protecting depositors for more than the insured portions of deposits.”55

This structure appears to clearly and strictly limit FDIC actions in situations like the collapse of
Silicon Valley Bank. However, the statue also provides an exception that essentially swallows
the rule: Section 1823(c)(4)(G) provides that the FDIC, the Federal Reserve, and the Secretary of
the Treasury “in consultation with the president” can “provide assistance” beyond the insurance
limitations as necessary if they determine that compliance with those limitations
“would have serious adverse effects on economic conditions or financial stability” and the
alternative “assistance ... would avoid or mitigate such adverse effects.56

It was this “Systemic Risk Exception” (sometimes referred to as the SRE) that the Treasury,
FDIC, and Federal Reserve invoked in their Joint Statement. Doing so required a two-thirds vote
of the board of directors of the FDIC and of the board of governors of the Federal Reserve.57

As an aside, it is worth noting the interplay between the Systemic Risk Exception triggered under
Section 1823(c)(4)(G) and the enhanced bank scrutiny implemented by the Dodd-Frank Act. The
Dodd-Frank Act was intended to identify large, systemically important institutions and subject
them to enhanced government oversight — by way of enhanced prudential standards.58
Logically, one might expect that a bank large enough to qualify for the Systemic Risk Exception
would be subject to such enhanced oversight. And yet, SVB fell below the threshold for the most
stringent rules.59 If the Systemic Risk Exception was appropriately invoked, that would suggest

53
12 USC § 1823(c)(4)(A) (2024).
54
12 USC § 1823(c)(4)(B) (2024).
55
12 USC §1823(c)(4)(E)(i)(I) (2024).
56
12 USC §1823(c)(4)(G)(i) (2024).
57
Ibid.
58
12 USC § 5365 (2024). The-Dodd Frank Act was passed in 2010, but an amendment in 2018 increased
the threshold for banks to receive enhanced prudential standards.
59
This was in part due to targeted lobbying to increase the threshold. See Erin Mansfield, “SVB lobbied
Congress for years to loosen bank regulations. Lawmakers knew the risks.” (13 April 2023), online: USA
Today <https://www.usatoday.com/story/news/politics/2023/04/13/svb-lobbying-bank-
regulations/11555491002/>; see also Issac Chotiner, “The Regulatory Breakdown Behind the Collapse of
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the threshold was set too high. Alternatively, if the thresholds were set at proper levels, that
would suggest the Systemic Risk Exception should not have been invoked for SVB. For the
reasons discussed below, I view the latter as the correct assessment.

(b) Funding

How does the FDIC back over $100 billion in deposits without cost to shareholders? In short, the
FDIC will pay out of its funds, which will then be replenished by fees charged to banks going
forward.60 As the Joint Statement noted, “Any losses to the Deposit Insurance Fund to support
uninsured depositors will be recovered by a special assessment on banks.”61 In theory, if the
FDIC ran out of money — which is extremely unlikely — the Federal Reserve and Treasury
would provide backstops.62 In that way, the Federal Government has put money up to support the
rescue plan, but that money is not at any real risk.

One might think about it this way: The President’s statement that no taxpayer dollars were at risk
is true. But SVB depositors, and other banks who benefit from the panic ending, are receiving a
subsidy no regular taxpayer can access. And those depositors are receiving this payment
regardless of whether their deposits were insured.

On the other side, the banks who will be assessed for any FDIC losses are not the banks who
failed, but rather the ones that survived.63 And although the assessments are directly levied on
the bank, some of the costs of those assessments will likely be passed on to the depositors
through interest rate reductions and fees. Most importantly, all the other large banks — and their
large depositors — now have a reason to expect similar treatment if they run into the same
troubles. That creates a serious moral hazard problem, to which I turn in the next section.

3. IMPLICATIONS

Silicon Valley Bank” (19 March 2023), online: The New Yorker < https://www.newyorker.com/news/q-
and-a/the-regulatory-breakdown-behind-the-collapse-of-silicon-valley-bank>.
60
Casey & Posner, supra note 40 at 481 and 494, for a discussion of the FDIC insurance program.
61
Joint Statement, supra note 37.
62
Board of Governors of the Federal Reserve System, “Federal Reserve Board announces it will make
available additional funding to eligible depository institutions to help assure banks have the ability to
meet the needs of all their depositors” (12 March 2023), online: Board of Governors of the Federal
Reserve System < https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm>
(“With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25
billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not
anticipate that it will be necessary to draw on these backstop funds.”).
63
Federal Deposit Insurance Corporation, “Final Rule on Special Assessment Pursuant to Systemic Risk
Determination” (16 November 2023), online: Federal Deposit Insurance Corporation
<https://www.fdic.gov/news/financial-institution-letters/2023/fil23058.html>. No bank with under $5
billion in total assets will pay the special assessment.
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The invocation of the Systemic Risk Exception was no small decision. As Michael Ohlrogge
points out, “Since the SRE was created in 1991, it has only been invoked twice to rescue
uninsured depositors at failed banks: Silicon Valley Bank and Signature Bank.”64 On the other
hand, at the time, these were the second and third largest bank failures in history.65

Still, some worry the floodgates are open and no large bank will ever be allowed to fail without a
government-sponsored full depositor rescue plan.66 There are various reasons this may be true.
One explanation is there was too much political and social pressure for a government with such
discretion to be able to hold back. Ohlrogge is skeptical of this explanation, noting several large
banks (with assets over $1 billion) failed during the financial crisis without the FDIC invoking
the Systemic Risk Exception.67 He points instead to mission creep of the FDIC to “rescue
uninsured depositors more frequently than Congress intended.”68

Ohlrogge is perhaps too quick to dismiss the influence of pure political pressure. After all, the
social media factor amplified the pressure in 2023 in an unprecedented way. Additionally, claims
that a bank failure could catalyze a crisis resonate more today precisely because of the
experience in the 2008 crisis. The pressure to avoid causing another crisis — coming from all
sides — is likely very high today. That was certainly the message Ackman tried to send in his
tweets. Finally, given the number of failing banks and other firms during the financial crisis, the
pressure to rescue the next one almost certainly waned after a certain number of bailout measures
were implemented and crisis became inevitable. That is to say, the atmosphere in March 2023
was very different from that in 2009 or 2010 when a crisis was already upon us. In 2023, the
country was just emerging from the Covid crisis and had lingering anxiety after having been
through the 2008 crisis. Pressure to prevent a crisis in that climate was much greater than
pressure to bail out just another failed bank after the systemic damage had already been done.

In any event, Ohlrogge is correct that the SVB rescue marks an increase — for whatever reason
— in the propensity of the United States Government to rescue banks. And that increased
propensity is noteworthy as the Government’s discretion to implement such a rescue is quite
broad.

It is true the statute requires the agreement of several key players before the exception is
triggered. With this three-key system, the super majority of the FDIC and Federal Reserve
boards along with the Treasury Secretary all must agree to invoke the exception.69 But the

64
Ohlrogge, supra note 42 at 23. The Systemic Risk Exception was invoked in three other situations —
not focused on rescuing uninsured depositors of failed banks — during the financial crisis; Ohlrogge,
supra note 42 at 24 “During the 2008 financial crisis, the SRE was invoked only three times: once to
establish a program of industry-wide support, once to support a bank that ultimately declined the support,
and once to provide proactive support to Citigroup to prevent it from failing.”
65
They are now third and fourth accounting for First Republic Bank.
66
Ohlrogge, supra note 42 at 31 claims the FDIC has a tendency to avoid uninsured depositor losses even
when doing so is not the most cost-efficient option. He claims since 2008 it has become a norm for the
FDIC to resolve full banks with whole (both uninsured and insured) deposit plans.
67
Ibid. at 44-45.
68
Ibid. at 31.
69
12 USC §1823(c)(4)(G) (2024).
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political reality is that if any one of the government actors is the holdout, they will face
enormous reputational risk. The entirety of blame for any consequences of a failure to rescue will
fall on the actor holding out. On the other hand, when they invoke the Systemic Risk Exception,
any one government actor can point to the fact that everyone else was on board. This dynamic
makes invocation of the exception by far the more attractive political move, especially so in an
environment of extreme media rhetoric and social media chatter.

The above analysis suggests that the banking system has a built-in moral hazard problem.70
While equity holders of the failed banks get wiped out,71 depositors are fully protected and likely
expect to receive the same protection in the future. As a result, banks have no need to compete
over stability, and depositors have no incentive to monitor or verify the stability and liquidity of
their bank. A depositor who isn’t fully protected has an incentive to monitor a bank’s stability.
She will not want to deposit in a bank with a disproportionate number of uninsured deposits or
long-term securities. She may demand an interest rate premium to cover any such risk. She may
also worry about a bank's risk profile and demand the bank diversify its clientele in case of a
downturn in a specific market — in the SVB case, the venture capital market. But, when she is

70
For a general discussion of moral hazard, see Casey & Posner, supra note 40 at 524.
71
Or at least that is what the government claims. The extent to which the interests of the holding company
SVBFG have been extinguished is the subject of intense litigation between SVBFG’s bankruptcy estate
and the FDIC. See, for example, SVB Fin. Grp. v. FDIC, supra note 8. To be clear, this litigation is about
payouts to the creditors of the holding company (SVBFG). The holding company is the equity holder of
the Bank (SVB). The government argues that SVBFG’s equity interest and its deposits in SVB were
wiped out (in contrast to other deposits of non-equity holders). The creditors of SVBFG argue to the
contrary. In all events, the interests of the ultimate holders of the common equity of SVBFG will be fully
extinguished by the plan of reorganization. See In re SVB Financial Group, supra note 8, Debtors Second
Amended Plan of Reorganization Under Chapter 11 the Bankruptcy Code, Doc # 1276; see also Hannah
Levitt, “Bond Investors Seek Billion’s from SVB’s Husk. Why Regulators Refuse to Pay” (26 April
2024), online: Bloomberg <https://www.bloomberg.com/news/articles/2024-04-26/investors-seek-
billions-from-svb-s-husk-why-regulators-refuse-to-pay>; Randi Love, “SVB Financial Securities Holders
Bemoan Bankruptcy Plan Outline” (10 May 2024), online: Bloomberg Law
<https://news.bloomberglaw.com/bankruptcy-law/svb-financial-securities-holders-bemoan-bankruptcy-
plan-outline>.
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fully protected by the government in all events, she doesn’t care about any of those things.72 The
depositor market, then, provides no discipline on the banks.73

Of course, moral hazard is an old problem and there are ways to mitigate its effects. Insurers
account for moral hazard by setting premiums based on risk levels, monitoring risk factors,
forcing the insured to bear some of the loss, and so on.74 The FDIC operates like a market insurer
and implements such mitigation measures.75 But that operation falls apart if the FDIC ultimately
pays out 100% of loss regardless of the risks taken and the premiums paid. This, in part, guides
Morgan Ricks’ proposal to eliminate the cap on FDIC insurance.76 He argues the FDIC should
admit it insures all deposits upfront and then strengthen regulatory oversight and appropriately
increase bank fees.

Similarly, the FDIC or the Federal Reserve could act more like a responsible market insurer by
monitoring these banks more closely.77

72
Professor Kathryn Judge has made this point in several contexts. In an interview about SVB’s bailout,
Professor Kathryn Judge says, “What we worried about with deposit insurance is moral hazard, right?
Like, this is the big drawback whenever we have insurance, is, well, nobody's going to care if their bank's
stable or not if the government's going to make them whole.” Nick Fountain, “Silicon Valley Bank’s
collapse and rescue” (15 March 2023), online: NPR < https://www.npr.org/transcripts/1163155347>;
Judge has discussed moral hazard before. Particularly, critiquing Covid-19 Bailouts, she states “by
shielding large corporate shareholders and creditors from a risk that they were contractually obligated to
bear, the government’s recent interventions make it more likely that companies will continue to load up
on debt, reducing their individual and collective resilience.” Similarly, she convincingly argues that
protecting uninsured debtors from “a risk that they were contractually obligated to bear” creates a
problem where “nobody is going to care if their bank’s stable or not.” Kathryn Judge, “The Truth About
the Covid-19 Bailouts” (15 April 2020), online: Forbes
<https://www.forbes.com/sites/kathrynjudge/2020/04/15/the-covid-19-bailouts/>.
While I have argued elsewhere that moral hazard might not always be as severe as people fear, see Casey
& Posner, supra note 40, but in the context of a rescue of uninsured depositors unrelated to any systemic
rescue plan, Professor Judge’s position is unassailable. Moral hazard should be the first concern.
73
See Martin Wolf, “Banks are designed to fail - and they do” (14 March 2023), online: Financial Times
<https://www.ft.com/content/09bfbb8d-22f5-4c70-9d85-2df7ed5c516e>. Wolf argues the rescue of SVB’s
uninsured depositors removed a source of private sector discipline on banks, allowing the bank to operate
outside the rules of the market economy.
74
In a published document for international guidance, the FDIC proposes differential premiums as one
solution to address moral hazard. Federal Deposit Insurance Corporation, “Options for Addressing Moral
Hazard” online (pdf): Federal Deposit Insurance Corporation <
https://www.fdic.gov/sites/default/files/2024-05/guidance-moral-hazard.pdf>.
75
Federal Deposit Insurance Corporation, “FDIC 2022-2026 Strategic Plan Insurance Program” (2022),
online: Federal Deposit Insurance Corporation <https://www.fdic.gov/about/strategic-
plans/strategic/insurance.html>.
76
Menand & Ricks, supra note 47.
77
Marshall S Huebner, “Silicon Valley Bank: A Tragedy in Three or Four Chapters” (2 April 2024), online
(pdf): Davis Polk + The University of Chicago Law School
<https://www.davispolk.com/sites/default/files/2023-11/NYSBA%20Keynote%20SVB%20Failure.pdf>.
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Another option is for the government to prohibit rescue plans and explicitly forbid the use of the
Systemic Risk Exception. But an absolute prohibition would be inadvisable. As Eric Posner and I
argued elsewhere, regulators should have discretion to implement bailouts when they are
necessary.78 But, this raises two puzzles. First, what does it mean for a bailout to be necessary?
In our view, the main driver should be macro-economic considerations.79 Essentially, bailouts
and rescues should be used to prevent contagion and reduce systemic risk, not as tools to favor
certain economic actors or the politically powerful.80

Second, how can the system provide the necessary discretion to government actors without
opening the door to abuse and creating moral hazard?81 A Systemic Risk Exception is likely
necessary.82 It should, however, be costly to trigger, have greater after-the-fact review, and come
with consequences. Those consequences might include allowing private actors to challenge
bailouts through legal causes of action against the government (but not individuals)83 or after-
the-fact congressional inquiry.84 The goal is to thread the needle of having a Systemic Risk
Exception, but only invoking it when the systemic risk is significant.

4. POTENTIAL SOLUTIONS

(a) Private Causes of Action

While private causes of action can be created by statute or judicial ruling, ideally, they would be
specified ahead of time and provide broad standing for parties to challenge improper bailouts
after the fact. This approach has been proposed in the past but has not been effectively
implemented in any major jurisdiction.85

Private causes of action could improve regulatory incentives if the judicial proceedings were
significantly public and imposed necessary sanctions. Allowing private parties to trigger judicial

78
Casey & Posner, supra note 40.
79
Ibid. at 522.
80
Ibid. at 529 (arguing that bailouts should be guided by the following principles: macroeconomic
impacts, moral hazards, discriminatory effects and procedural fairness); at 529 and 536 (arguing that
bailouts should only been given out during a systemic financial crisis when there are significant negative
macroeconomic effects and limited moral hazard impacts); at 534 (favoring a presumption of a regulatory
meeting before a bailout, giving both parties time to present arguments on potential impacts).
81
Posner and I refer to this as the paradox of bailout regulation. Ibid. at 536.
82
Ibid. at 534-35.
83
Ibid. at 535 suggests courts could play a role after a bailout determining if the bailout was executed
properly, making parties liable for remedy.
84
Ibid. at 534-36 (arguing for ex post oversight from courts and Congress to impose costs on the exercise
of bailout discretion).
85
Ibid. at 535; David Zaring, “Litigating the Financial Crisis” (2014) 100:1405 Virginia Law Review at
1433 and 1481, online (pdf): Virginia Law Review <https://virginialawreview.org/wp-
content/uploads/2020/12/Zaring_Book.pdf>.
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oversight would impose costs — both reputational and administrative — on government actors
who implement unnecessary rescue plans either to favor certain parties or simply to bow to
political pressure. In the case of SVB, it is too late for this ideal to be implemented. But the
litigation surrounding the bankruptcy of the holding company does provide a venue for an
imperfect version of judicial oversight.

(b) Statutory Ambiguity

Legislatures can also provide a way to invoke oversight. For example, they could use statutory
ambiguity to impose political costs for agencies exercising bailout authority. If the relevant
statute were silent on the availability of a Systemic Risk Exception, it might create significant
counter political pressure and give rise to ex post court challenges such that the government
actors would think harder about exercising the rescue.

This increases the cost of bailouts, but only slightly. Such statutory ambiguity is unlikely to
prevent bailouts when obviously necessary. As we saw in the financial crisis86 and at the outset
of Covid,87 the Federal Government — and the Federal Reserve in particular — is innovative and
often pushes the boundaries of its authority. The most dramatic and effective rescue measure
during Covid was the Federal Reserve's enormous lending operations in March 2020. The
authority to take such dramatic action was by no means obvious, and yet the Federal Reserve
acted swiftly in the face of an immediate and enormous crisis.

The ambiguity does, however, create some pressure for the government to justify and explain its
actions. This suggests the lack of statutory authority would not stop the government from
implementing a rescue plan but could increase political costs through after-the-fact congressional
hearings and court proceedings. In this scenario, silence is likely a better tool than an outright
prohibition, which might raise the cost so high that the exception is never invoked even when
necessary. The goal is to make government actors more cautious (but not too cautious!) when

86
In the 2008 financial crisis, the government passed the Housing and Economic Recovery Act (HERA)
giving the treasury the power to make investments into the Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation. This allowed the government to place the corporations into a
conservatorship and inject massive capital of preferred equity. Posner and I argue this represents “some of
the different types of bailouts and bailout-like actions that the government can use to address the financial
difficulties of systemically important institutions.” Casey & Posner, supra note 40 at 510. The Federal
Reserve also got creative. Through discount window lending “the Fed lent widely to banks experiencing
liquidity difficulties, and in this way rescued banks and their creditors” and “also established numerous
broad based credit facilities”. Ibid. at 513.
87
In 2020 the government passed the CARES Act, provide various rescue measures including the
Paycheck Protection Program for small businesses. Additionally, “On March 17 and 18, 2020, the Federal
Reserve announced three major lending facilities to be established” with the effect “of providing massive
liquidity to the financial system”, supplemented by additional relief such as the Primary Market Corporate
Credit Facility and the Secondary Market Corporate Credit Facility. Anthony Casey, “Bankruptcy &
Bailouts, Subsidies & Stimulus: The Government Toolset for Responding to Market Distress” (2021)
2021:3 University of Chicago Legal Forum at 67 and 69.
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exercising bailout authority. Of course, it is impossible to calibrate these costs perfectly, so the
solution will always be second best.

(c) Statutory Thresholds

Another option would be to set a high statutory threshold for the Systemic Risk Exception. The
problem with this approach is that any statutory threshold enumerating a factual predicate will
likely result in nothing more than a recitation of the existence of the statutory predicate in the
statement announcing the rescue plan. Indeed, the SVB bailout and the joint statement
announcing it suggest that statutory requirements impose very little in the way of meaningful
constraints.

(d) Separating Powers

A final consideration, which ties to Ohlrogge’s diagnosis of mission creep, is to separate the
powers for the Systemic Risk Exception entirely from the role of the FDIC as insurer. To curb
moral hazard, the FDIC should operate as a market insurer, monitoring and disciplining the
stability and risk of the banks it insures. This function is inherently in conflict with the role of
rescuing systemically important institutions to prevent contagion.

One might completely separate these roles, leaving the FDIC to simply administer insurance, and
then allocating rescue authority to other agencies. For example, it could be the Federal Reserve
or the Treasury alone, or the President who has the rescue authority independent of the FDIC.
This would eliminate the problem of mission creep.

An added benefit of such a measure is the concentration of bailout and rescue responsibility in
the hands of one actor. This imposes a higher cost on that actor as they must take sole
responsibility for the cost of the rescue. It may seem counterintuitive, but by requiring the
concerted action of all three agencies and the President, the statute at play might actually dilute
the responsibility. With the support of the group, it may be easier, not harder, to implement the
Systemic Risk Exception. The exact dynamic is not certain. While we can model these
incentives, we can only confirm them through experimentation and observation, which is
essentially impossible to do in a realistic setting.

(e) Independent Agency

Along those same lines, one could envision a structure where an existing or newly created
government actor is prohibited from participating in the rescue decision entirely and is instead
empowered only to conduct an independent ex post review of the rescue decision. More directly,
legislation could create a standing bailout and rescue oversight administrative agency whose only
responsibility is to conduct ex post reviews of such decisions. This structure of oversight for
bailouts and bank rescue has not, to my knowledge, been implemented in any major
jurisdictions. While the Federal Reserve and the FDIC can review their own bailout decisions,
and Congress can hold hearings, the creation of a specific agency could foster a focused purpose,
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the recruitment of specifically qualified investigators, and the development of oversight
expertise.

Of course, close attention would have to be paid to the incentives and independence of this entity
to ensure that it is not captured by or structurally biased in favor of the government actors with
the initial rescue power. But that is true of all independent agencies.

5. CONCLUSION

The case study of SVB serves as a warning about the moral hazard inherent in any rescue
authority. As other countries design their own structures for bank rescues, this example should be
closely considered. While the rescue of systemically important banks is distinct from the rescue
of non-systemically important banks, the line between the two categories can be hard to identify
in the moment, and even harder ahead of time.

As a result, the design of a bank-rescue plan needs to create strong disincentives for the rescue of
non-systemically important banks while not impeding truly necessary bailouts. While it is
impossible to tailor precisely, there are potential measures — like those laid out above — that
would move the system closer to the ideal. These measures would foster the monitoring of bank
stability by regulators as well as the creation of institutional structures, liability rules, and
oversight mechanisms that create incentives for depositors to do their own monitoring.