Banking crisis fears are back: First Republic bank suffers outflow of 100 billion

The First Republic has already lost more than 90 percent of its stock market value since early March when Silicon Valley Bank collapsed. And what was left after that has recently almost halved again. The bank had to announce that customers were withdrawing enormous amounts from it: in the first quarter of 2023, this amounted to around 100 billion dollars.

By comparison, Credit Suisse poured out as much as 110 billion francs in the fourth quarter of 2022 – an event that financial market regulator Finma called “historically unique”. In the first quarter, customers withdrew another CHF 60 billion and Credit Suisse was beyond rescue.

The First Republic is one of several regional banks in the US, many of which are suffering, albeit to a much lesser extent, from customer withdrawals, according to the Wall Street Journal. The concern now is that these regional banks will have to cut back on their lending and thus curb economic growth. Regional banks are especially important for private customers and businesses in their area of ​​residence.

There could be a wave of mergers, writes The Economist. Measured by the number of inhabitants, there are significantly more banks in the US than in the EU. If these small and medium-sized banks have to offer higher interest rates to prevent customers from walking away, their profits will be squeezed. After the collapse of the Silicon Valley Bank, stricter rules should also be introduced for them, which in turn entails costs. Many banks could therefore seek refuge in mergers.

Return of bank runs

With Silicon Valley Bank and now the First Republic, the US is seeing the return of bank runs on state-regulated banks. Why are banks inherently vulnerable to such runs?

Banks borrow money from their customers, which they can withdraw at any time. Yet the banks lend this money for a long time. They use it to make loans to businesses, mortgages to homeowners, or buy government bonds.

These are solid values, but it takes time to monetize them. That is why every bank shakes when many customers want their money back at once. Banks are therefore always unstable. But what actually triggers runs?

Rumors may suffice

Runs can happen even if there is no good reason for it. Two economists who were awarded the Nobel Prize in 2022 prove this. “A run is caused by a shift in expectations that can depend on almost anything.”

Mere rumors of a bank’s alleged problems may suffice, and Mr. Meier already thinks he must withdraw his money before Müller, Rossi and Krasniqi do and there is nothing left for him. This is how the run comes about, like a self-fulfilling prophecy. So why don’t runs always get done?

How runs were once beaten

Two antidotes have been found that have worked for a long time. The state insured the savings of all small customers, so that Meier no longer has to be ahead of Müller and Rossi as soon as there are rumors about a bank.

The second antidote is for central banks to become lenders of last resort. Banks can always get credit from them if they can provide assets as collateral.

No one else does this in times of panic – not even against assets everyone takes in good times. Having lenders of last resort allows banks to pay out customers without having to put their assets up for sale. But why is it running again now?

Change has made banks vulnerable to bank runs again

The customers who stormed the banks were barely covered by deposit insurance. Because they are intended for small customers who have relatively little in the bank. In Switzerland, amounts of up to 100,000 francs per customer and bank are insured, in the US up to $250,000.

However, the majority of clients who withdraw money from Silicon Valley Bank were major clients. Only 12 percent of deposits were insured there. It must have been the same with Credit Suisse with its “ultra-high-net-worth individuals,” in UHNWI parlance.

Such UHNWI-Smiths or al-Khalifa should really fear for most of their money when other super-rich storm the CS. The US is now discussing increasing deposit insurance.

Financial historian Gary Gorton of Yale University says that “the problem of bank runs has not been permanently solved.” Deposit guarantee helps if banks mainly have small customers. But over the past 40 years, they’ve increasingly moved on to large clients, so that well over half of all bank deposits are now uninsured – and thus susceptible to another run. (aargauerzeitung.ch)