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Reallocating Liquidity to Resolve a Crisis

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Abstract

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.

Suggested Citation

  • Kinda Hachem, 2024. "Reallocating Liquidity to Resolve a Crisis," Liberty Street Economics 20240812, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:98659
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    More about this item

    Keywords

    bank run; bank liquidity; interbank markets; Clearinghouse; Panic of 1873;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G01 - Financial Economics - - General - - - Financial Crises

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