M uch about the collapse of Silicon Valley Bank has been profoundly modern. The bank’s name. A client base of tech-focused venture capitalists. A panic whipped up by tweets. Cash withdrawals via smartphones. At its crux, though, the lender’s fall was the latest iteration of a classic bank run. And the solution, a central bank stepping in to backstop the financial system, was time-honoured, too. So well-trodden is the topic in economics that the lyrical phrase describing the central bank’s actions, “lender of last resort”, is often abridged to its ungainly acronym, lolr.
A review of the history shows both the typical and the unique in the case of Silicon Valley Bank. There is ample, albeit imperfect, precedent for the Fed’s actions. Yet they continue a worrying trend of ever-broader interventions and, consequently, distortions to the financial system. This gives rise to questions about whether, in the long run, the Fed’s pursuit of stability harms the economy.
It would be remiss for a column in The Economist to overlook the person often credited with first articulating the theory of lolr: Walter Bagehot, an editor of this newspaper in the 19th century. Over the years, his ideas evolved into a rule for how central banks should manage panics: lend quickly and freely, at a punitive rate, against good collateral. As Sir Paul Tucker, formerly of the Bank of England, has put it, the logic is twofold. Knowing the central bank stands behind commercial lenders, depositors have less incentive to flee. If a run does occur, intervention helps limit sell-offs.