The writer is a professor of finance at the Stanford Graduate School of Business and a senior fellow at the Hoover Institution
After the failure of First Republic this week, some have aired hopes that the crisis, which has led to three of the four biggest bank collapses in US history, is drawing to an end.
But the industry’s faultlines remain exposed. As interest rates rise, bank assets such as government bonds and mortgages may lose value. This creates an ongoing risk of failure through two related channels.
First, a bank may self-evidently become insolvent if its liabilities exceed the worth of its assets. Indeed, this was the case for nearly one-third of savings and loan institutions that failed in the 1980s and 1990s.
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