On March 21st PacWest, another Californian lender, reported it had lost a fifth of its deposits since the start of 2023.īanks suffering from deposit flight, such as First Republic and PacWest, can turn to other financial institutions for liquidity-or they can turn to the Fed’s newly expanded lending facilities. It is now reported to be seeking additional support from financial institutions and possibly the government, too. On March 17th First Republic arranged for 11 major banks to park $30bn-worth of deposits with it. Lots of the lender’s clients are wealthy individuals, who appear to be quickest to pull deposits. First Republic has reportedly lost $70bn in deposits-around 40% of its total as of the end of 2022-since svb failed. The clearest evidence of flight is from two California-based banks. This explains why bank share prices do not collapse every time rates rise, instead falling just as much as the broader market does. The paper argues “banks closely match the interest-rate sensitivities of their interest income and expense”, which produces remarkably stable net-interest margins. A recent paper by Itamar Drechsler of the University of Pennsylvania and co-authors points out that bank deposits, which tend to be stable and interest-rate insensitive, are a natural hedge for the sort of long-term, fixed-rate lending that banks favour. Such paper losses remain hypothetical so long as depositors stick around. Worryingly, one in ten institutions looks more poorly capitalised than svb. If these assets had to be liquidated tomorrow the industry would lose nearly a third of its capital base. Banks regularly publish data on the losses they face on fixed-rate assets, such as bond portfolios.
Start with the value of financial institutions’ assets. The answer depends on the extent to which svb’s problems are found elsewhere. The question now is whether what happened over the past fortnight was a brutal crunch or the start of a long, drawn-out process, as in the 1980s. The dynamic will sound familiar to anyone who has paid attention to Silicon Valley Bank ( svb), where a rate shock slashed the value of its fixed-rate assets, prompting deposit flight and the institution’s collapse.
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