By James Lee, David Wessel
In March 2023, the Federal Reserve responded quickly to the failures of Silicon Valley Bank (SVB) and Signature Bank. It joined other regulators in lifting the $250,000 per account deposit insurance for customers of those two banks, described in more detail in “How does deposit insurance work?” This explainer describes other steps the Fed took.
What is a lender of last resort?
Banks, in general, take deposits from their customers (who often can take their money out whenever they want) and put the money into loans or securities (often longer-term commitments that sometimes cannot be easily sold). In normal times, when most depositors are content to leave their money in the bank, this works well. Banks are required by law to maintain a portion of deposits in cash so that they can meet customer demands for withdrawal.
However, if depositors withdraw a lot of money at once, the bank may not have enough cash on hand to satisfy them. This can happen if depositors lose confidence in the bank’s ability to meet all withdrawal demands so every depositor tries to be at the head of the line – a run on the bank, a phenomenon explained by economists Douglas Diamond and Philip Dybvig for which…