It's said that no bank (even the best-managed) can withstand a fullscale bank run. So to the extent that the US side of things created a crisis of confidence, that might have been enough to topple SVB UK, even if all of its fundamentals were OK.
> It's said that no bank (even the best-managed) can withstand a fullscale bank run
I keep reading this but this should not be true
Any bank will hit liquidity issues on a full-on bank run, as not 100% of a banks assets will be marketable, but central banks will provide emergency liquidity in these situations
But banks should not hit insolvency issues like SVB did
The line is a little blurry. You can be underwater in mark-to-market terms on a bond portfolio, but be fine if you guess the timeline for redemption and can hold them to maturity. Banks estimate what percentage of their assets will be held to maturity. So needing extra liquidity causes insolvency.
I think what made it worse here is that depositors of SVB were undiversified... If you had a bank that held deposits from various kinds of people, it's less likely that all of them would want their money out at the same time unless there was some of kind of widespread change in sentiment towards the overall financial system.
> Any bank will hit liquidity issues on a full-on bank run, as not 100% of a banks assets will be marketable, but central banks will provide emergency liquidity in these situations
That was not the case in the US for banks with HTM assets until the backstop program announced by the Fed in the wake of the SVB collapse.
> But banks should not hit insolvency issues like SVB did
SVB’s liquidity issues turned into solvency issues because of the absence of a liquidity backstop.
There's a certain amount of risk with all lending and investment that banks do with deposit funds. This can be home loans, government bonds, and other relatively safe products.
I don't think it should be up to the government to back these risks, because if banks think the government will always rescue them, they don't need to care as much about risky investments.
You could argue that it is depositor money, so they're not really saving the bank, they're saving customers. But if banks don't have to care about their risk profile, customers will deposit their money in whatever bank is offering the greatest interest rates, which will likely be those that are making the riskiest investments, which could lead to more bank failures with market swings.
shawabawa3|3 years ago
I keep reading this but this should not be true
Any bank will hit liquidity issues on a full-on bank run, as not 100% of a banks assets will be marketable, but central banks will provide emergency liquidity in these situations
But banks should not hit insolvency issues like SVB did
HWR_14|3 years ago
vatsalaggarwal|3 years ago
dragonwriter|3 years ago
That was not the case in the US for banks with HTM assets until the backstop program announced by the Fed in the wake of the SVB collapse.
> But banks should not hit insolvency issues like SVB did
SVB’s liquidity issues turned into solvency issues because of the absence of a liquidity backstop.
kyrra|3 years ago
I don't think it should be up to the government to back these risks, because if banks think the government will always rescue them, they don't need to care as much about risky investments.
You could argue that it is depositor money, so they're not really saving the bank, they're saving customers. But if banks don't have to care about their risk profile, customers will deposit their money in whatever bank is offering the greatest interest rates, which will likely be those that are making the riskiest investments, which could lead to more bank failures with market swings.
unknown|3 years ago
[deleted]
alasdair_|3 years ago
jalapenos|3 years ago