Larry Summers Suggests Short-Term Steps To Help Government Avoid Contagion — Says SVB Committed 'One Of The Most Elementary Errors...'

Former Treasury Secretary Lawrence Summers reportedly said that Silicon Valley Bank committed one of the most elementary errors in banking — borrowing short-term funds to invest in long-tenor assets.

What Happened: Summers pointed out that the government must take immediate steps to ensure depositors get their money back, in an interview with CNN.

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"In the short run, I think they need to make this facility that will provide loans to banks to enable them to pay off depositors who want to get access to their funds. They should make sure that facility is up and running and effective and actually usable," Summers said.

Elementary Error: Summers said that for the longer run, there are important lessons to be learnt about supervision and regulation as the Silicon Valley Bank committed one of the most basic errors in banking.

"It has committed kind of one of the most elementary errors in banking of borrowing money in a very short term way and then investing it in a long term way. And then when interest rates went up, those assets lost their value. That put the institution in a problematic situation," Summers highlighted.

The former treasury secretary also said the government needs to inspect institutions that are clearly struggling.

"There may be others like Signature (that) need to be closed. But it will represent only a very small fraction of the country’s banking system," Summers noted.

The crisis commenced with the winding down of the Silicon Valley Bank last week following which Signature Bank was closed by New York regulators.

Banking and financial stocks have been taking a hard beating despite assurances from President Joe Biden himself to do whatever it takes to address the threat to the banking system.

Price Action: JPMorgan Chase & Co JPM shares closed 1.8% lower, Bank of America Corp BAC lost 5.81% while Morgan Stanley MS shares ended 2.29% lower. Western Alliance Bancorporation WAL shares lost 47.06% while PacWest Bancorp PACW lost 21.05%.

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