The failures of Silicon Valley Bank and Signature Bank in the United States in March 2023 were a stark reminder of the fragility associated with banks’ funding structures, especially when they rely on an inadequately diverse uninsured deposit base.
These cases also provided new evidence of the speed at which, in a world of digital banking and social networks enabling the rapid flow of information, adverse news on a bank’s solvency or liquidity position can put it on the brink of failure in a matter of weeks, if not days or even hours.
A few days after the Silicon Valley Bank and Signature Bank failures, the forced merger of Credit Suisse with UBS showed how the legacy and viability problems of a larger bank, if left unresolved for a long period, may also crystalize in the need for a sudden intervention by the authorities when investor confidence breaks down, deposits are withdrawn on a massive scale and access to market funding is lost.
A recent report from the Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) reviews an extensive list of existing and potential policy tools that could be considered for addressing banks’ vulnerability to runs and the underlying causes of this vulnerability.
The report stated: “One way to improve or reinforce the liquidity requirements could be to require that all debt securities qualifying as liquid assets be measured at fair value in the financial statements. For the calculation of the LCR, all assets qualified as liquid are measured at fair value. However, in their financial statements, banks are allowed to measure liquid assets at amortised cost. While this would not affect the LCR calculation, it seems illogical to classify some securities as ‘held-to-maturity’ for accounting purposes and at the same time consider them as available to cover sudden liquidity needs for prudential purposes. However, one can also argue that, according to prudential regulation, securities qualifying as liquid assets do not necessarily need to be sold, as they can be used in repo transactions.”