Confidence Crashed: How 2023’s Banking Turmoil Shook the System - Preet Harquissandas

diyakaravdra
Nov 8
3 min read

Motivation

In March 2023, a wave of panic swept through global financial markets as Silicon Valley Bank and several other banks fell one after another. What began as a minor liquidity problem rapidly escalated into a crisis of confidence. Within a matter of days, billions in deposits were withdrawn, highlighting the fragility of even 'well-capitalized' institutions in a digital landscape. Central banks stepped in to avert further issues, yet this scenario raised concerning questions. How could these failures occur in a system that was supposedly stronger after 2008? And what does this reveal about the limitations of existing regulations and crisis management strategies?

Research Questions

1. What caused interest rate and liquidity risks to bypass regulatory stress tests?

2. In what ways can deposit insurance and liquidity assistance help rebuild trust in the digital era?

3. What additional resolution mechanisms are required alongside conventional bail-ins?

Context

The crisis didn’t happen suddenly. After years of near-zero rates, central banks quickly raised interest rates to tackle inflation. Banks that had invested heavily in long-term bonds suddenly faced large unrealized losses. When depositors, especially tech companies with big, uninsured balances, began to move their funds, the situation quickly got out of hand. Digital banking made those withdrawals happen in real time, leaving regulators and executives little time to respond (1). Authorities rushed in with emergency funding and guarantees to stop the panic from spreading. However, the incident exposed serious flaws in the system: outdated liquidity models, lazy supervision, and a growing gap between modern finance and old-fashioned regulations.

Theories & Rhetoric

Three main failures stand out. First, banks seriously underestimated interest-rate risk. They thought deposits would stay stable, even as their bond portfolios lost significant value. Second, liquidity stress tests did not capture the real speed of digital withdrawals. Third, oversight was uneven. U.S. regional banks faced lighter regulations compared to global giants, which delayed regulatory action.

At first, officials described the turmoil as “contained.” (2) However, the markets suggested otherwise. Investors flocked to money-market funds and Treasuries, indicating a wider loss of trust. In hindsight, the crisis was not about solvency; it was about credibility. The disconnect between what regulators believed and how depositors acted proved fatal for several institutions.

Alternatives & Regional Case Study

Since then, policymakers have started to tighten frameworks. US regulators plan to include sharper interest-rate sensitivity tests and stricter liquidity requirements. The EU and UK are exploring more flexible resolution tools, like temporary bridge banks and government-backed liquidity support, to avoid taxpayer bailouts (3).

Switzerland’s experience with Credit Suisse was especially instructive. Despite strong capital ratios, a sudden loss of confidence forced UBS to acquire the bank under government guarantees. It showed that even major players can fall quickly when trust disappears. The lesson is clear: resolution planning must consider speed. Money moves in seconds, and responses must too.

Conclusion

The turmoil in March 2023 reminded us that banking relies on confidence, not just capital. Regulation may have improved since 2008 (4), but the system still hasn’t adjusted to the realities of instant withdrawals and panic driven by social media. To build resilience, we need to update stress tests for immediate liquidity shocks, strengthen deposit protection, and ensure reliable, quick backup plans.

Takeaways:

1. Monitor liquidity in real time, not quarterly.

2. Make deposit insurance and resolution tools suitable for the digital age.

3. When confidence can disappear in a tweet, stability must keep pace.