Analysis: After the Silicon Valley Bank collapse, is it time for tighter liquidity rules?
Experts have suggested that the global banking system needs tighter liquidity rules after the largest bank run in history felled Silicon Valley Bank (SVB) last month.
The impact of mobile banking, new technologies and social media means it is easier than ever to move money around.
More than $42bn flowed out of SVB in just one day, while Credit Suisse’s chair said they saw “massive outflows” in the week before its collapse.
Speaking to shareholders at the bank’s AGM this week, chair Axel Lehmann said social media “fanned the flames” of depositors’ fear.
In the wake of these events, regulators have suggested that tighter rules might be necessary.
On Tuesday this week, Mark Carney, former governor of the Bank of England said financial rules needed “rethinking” to reflect how quickly cash can move in a digital age.
In an interview with Reuters, Carney said SVB’s collapse demonstrated the “greater flightiness” of deposits.
“That will, I think, require some rethinking of the assumptions behind liquidity coverage ratio, the net stable funding ratio,” Carney said.
The liquidity coverage ratio is the proportion of highly liquid assets held by financial institutions to ensure they can provide cash to customers demanding their money back. The net stable funding ratio, meanwhile, measures the ratio of long term assets funded by stable funding, like customer deposits, as opposed to riskier wholesale funding, like interbank lending.
Both rules were put in place by the Basel Committee as part of a regulatory overhaul after the 2008 financial crisis. Pre-financial crisis banks relied too heavily on short-term funding.
Members of the Basel banking committee have also recently suggested that there should be tighter rules. Claude Wampach,a Luxembourg-based member of the Basel Committee, told the Financial Times regulators should check whether the liquidity coverage ratio was “sufficiently calibrated”.
And the chief executive of the UK’s Prudential Regulation Authority, Sam Woods, told MPs last month that liquidity rules might now be up for discussion again.
“I think there’s going to be a question for all of us… as to whether those outflow rates are quite right,” Woods said, arguing there’s a case for “recalibrating” the metric.
However, industry figures warned against tightening regulations too much.
“People who want tighter liquidity rules are afraid, but the only ‘correct’ answer for them is one in which deposits and loans are maturity matched. This would suck credit out of the economy to a degree that would bring the world to a halt.” David Jarvis, CEO of the digital bank Griffin, told Morning Wire
Jarvis argued that at both SVB and Credit Suisse the root the bank runs were “symptoms” while the root cause was “bad culture”.
Chair of Zenus Bank Mushegh Tovmasyan also suggested bank runs were an inherent danger in banking.
“Funding long term debt with short term deposits is always going to be a challenge,” Tovmasyan told Morning Wire, suggesting it would be difficult to put in place new regulations to tackle the dangers of the digital world .
Lee Doyle, co-chair of the banking industry group at Ashurst, said it would be a “knee jerk reaction” to tighten the liquidity ratio, stressing issues at the moment are “not ones of liquidity”.
“Recent events should arguably give people confidence that the commercial banks are in a strong capital and liquidity position and the reforms of the last decade are being shown to be effective,” Doyle told Morning Wire