The National Bureau of Economic Research, which provides the start and end dates for recessions, has issued a working paper that says none of the big banks can survive a bank run for even 30 days.
“The revised tests suggest it is unlikely that any of the six banks would survive a liquidity crisis for 30 days. This negative finding is most clear-cut for Goldman Sachs and Morgan Stanley,” says Laurence Ball from the Department of Economics at Johns Hopkins University.
He looked at six of the largest banks: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.
They have to undergo a stress test under the Liquidity Coverage Ratio (LCR) regulation that came into force in 2017. Ball says:
“This rule requires a bank to repeatedly perform a liquidity stress test. The bank must calculate its loss of cash in a 30-day stress scenario specified in the rule, a scenario that regulators say is based on the 2008 crisis.
The bank must also calculate its holdings of ‘high quality liquid assets’ (HQLA) that could be monetized quickly to accommodate cash outflows.
A bank’s LCR—the ratio of its HQLA to its loss of cash in the stress scenario—must be at least 100%.”
The banks comply with the LCR rules, but the paper argues some of the LCR rules’ assumptions are not pessimistic enough to capture what would happen in a crisis like 2008.
“A bank’s losses of cash in a crisis would probably exceed its losses in the rule’s stress scenario, so compliance with the rule does not really ensure that the bank could survive for 30 days,” says Ball.
The LCR stress scenario understates three types of cash outflows: withdrawals of retail deposits; losses of secured funding such as repurchase agreements; and collateral calls under derivatives contracts.
The scenario also overstates the level of cash inflows available to offset outflows, the paper says.
The paper was published at the end of 2020, but only now has come to attention following the collapse or state managed merger of banks that held close to $1 trillion in customer deposits.
The failure of the Silicon Valley Bank (SVB) has grabbed most of the headlines, but numerous other banks continue to be on the brink.
The stock price of First Republic for example crashed another 15% on Wednesday after the Treasury Secretary Janet Yellen ditched the idea of increasing insurance for bank deposits.
A smaller bank, PacWest Bancorp with deposits of about $30 billion, dived 17% at the same time while the index for regional banks overall showed red by 6% following Yellen’s comments to Congress.
That may well indicate the crisis is far from over with some attention turning to the San Francisco Federal Reserve Bank in particular.
They had oversight over the Silicon Valley Bank, yet SVB could barely last a day, raising questions about the effectiveness of the stress tests they carried out.
These smaller banks follow different rules, but the speed with which SVB crashed took many by surprise as following the experience of 2008, you’d think lessons would have been learned.
15 years on moreover the world is very different from 2008, when Twitter didn’t exist in usage and Facebook was still mainly just for students while internet banking, let alone mobile banking – no iPhones back then – was bare minimal if it was available at all.
Nowadays the world at your fingertips clearly applies to bankruns too as we have seen earlier this month, but the working paper does not incorporate these new insights and still finds that an entity like Goldman Sachs won’t last two weeks.
That might be insufficient for authorities to respond, the 30 days rule so designed to give them time, and the author says he is not even aggressive in his revised stress test criteria.
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- Source: https://www.trustnodes.com/2023/03/23/goldman-sachs-and-jp-morgan-cant-survive-bank-run-says-nber-paper-fail-stress-test
