Viral bank runs could spread
UBS near re$cue of Credit Suisse
Swiss bank UBS Group closed in on a deal to save its troubled rival, Credit Suisse, on Saturday, as it was revealed that nearly 200 more banks may be vulnerable to the type of risk that took down Silicon Valley Bank.
There are 186 banks across the country that could fail if half of their depositors withdraw their funds because of fear of the declining value of the assets they hold, a study published on the Social Science Research Network found.
Even totally insured depositors — those with $250,000 or less in the bank — could have problems getting their cash if these institutions face the sort of run that Silicon Valley saw in the days before it was shut down March 10.
The Santa Clara, Calif., institution parked much of its cash in long-term government bonds, which are ultra-safe in terms of losing the initial investment, but were not worth as much as when SVB bought them, because interest rates have since gone higher.
Had to sell bonds
The bank had to sell off some of those bonds to meet customer demands for withdrawals at less than it paid for them, resulting in a nearly $2 billion loss.
The study shows that a slew of those other banks could also be vulnerable if a high percentage of worried customers start trying to withdraw their deposits.
“Our calculations suggest these banks are certainly at a potential risk of a run, absent other government intervention or recapitalization,” the economists wrote.
The study looked at banks’ asset books nationwide, and found an estimated $2 trillion loss in their market value.
This sort of worry fueled volatile trading on Wall Street last week and in particular threatens regional banks such as First Republic. That bank staved off potential collapse last week with a $30 billion infusion from 11 larger financial firms, but still may end up being bought out.
Meanwhile, the Swiss government and other global authorities, including some from the US, are working toward sealing the agreement Sunday in the hopes of shoring up trust in the banking system before stock markets open Monday.
The scramble to get the deal done is playing out after the Swiss National Bank and that country’s top regulator, Finma, told their international counterparts they regard a deal with UBS as the only option to stop Credit Suisse from collapsing, the Financial Times reported.
It will be the first combination of two global systemically important banks since the financial crisis of 2008-2009, according to Bloomberg News.
One big institution
A full merger would create one of the largest financial institutions in Europe.
Switzerland is preparing to use emergency measures to fast-track the deal, the FT said.
The 167-year-old Credit Suisse got more than $50 billion from the Swiss National Bank this week as worries mounted following the shock to the banking system generated by the collapse of Silicon Valley Bank.
But that infusion didn’t stop investors from selling off the bank’s stock, or slow down depositors who were pulling their money out of accounts at a rate of $10.8 billion per day, the FT reported.
The panic forced the Swiss National Bank and the country’s financial regulator to organize the weekend’s talks on the potential takeover by UBS, which with $1.1 trillion in assets is about twice the size of Credit Suisse, The Wall Street Journal reported.