There are banks and then there are systemically important banks. These banks are too-big-to fail. They are required to maintain certain financial buffers to protect depositors from fast moving markets, concentrated bank investments and guard against putting the broader financial system at risk.
These systemically important banks face higher scrutiny and more stringent stress tests. One problem with the most recent round of stress tests scenarios from the Federal Reserve, though — they don’t include higher interest rates.
One only needs to remember the swift failure of Silicon Valley Bank to understand the risk of that omission. Now, the Fed’s stress test hypotheticals were released about two weeks before the run on SVB began. And, despite federal banking regulators using the systemically important exception to rescue depositors, SVB was not labeled a systemically important bank prior to its collapse.
