Liquidity support for mid-sized US banks is a band-aid solution that masks underlying issues

In a five-day period in early March 2023, three mid-sized US banks collapsed: Silicon Valley Bank, Signature Bank, and Silvergate Bank. The United States Federal Reserve stepped in with an emergency lending program to support liquidity and mitigate the risk of contagion. While that will probably work in the short term, it doesn’t solve the problem, says Mo Chaudhury, an Associate Professor of Finance (Teaching) at Desautels. “It’s a good thing they stepped in, but in my view, it just kicks the can down the road,” Chaudhury explained in an interview with TRT World, a Turkish public broadcaster. “In the near future we will not see many more banks going through massive withdrawals in a short period of time. However, it does not address the fundamental problems that caused these issues in the first place.”