2023-04-25 08:52:38
With the continuation of the storm of interest increases in the US Federal Reserve, the crisis conditions experienced by the global banking sectors continue until now. This indicates that what happened with Credit Suisse last March may not be the last episode in a series of banking collapses that began in the United States and spread to Europe. Noting that Switzerland has not yet finished dealing with the repercussions of the bank’s collapse, and the effects of its acquisition deal. What also raises questions regarding the durability of the tools that Western banks possess today, when dealing with crises of this kind.
The erosion of US deposits continues
The latest figures published by the US Federal Reserve yesterday, Monday, showed the continued erosion in the volume of US bank deposits, which decreased by $76.2 billion in the second week of April alone, bringing the volume of these deposits to 17.38 trillion dollars. These figures came within the “H.8” report issued by the US Federal Reserve, which is the most prominent report on which financial studies rely to measure the solvency and liquidity of the US financial sector and the size of its risks. This report usually summarizes the combined balance sheet of all US banks, with all the elements of their liabilities and assets, on a weekly basis, which gives its conclusions exceptional importance.
According to the figures, the decrease in the volume of deposits affected the balance sheets of the 25 largest banks in the US market, as well as the smaller banks, which indicates that the wave of withdrawals was not limited to small banks alone.
A week before this report, financial estimates indicated that deposits in three US banks, namely J. with me. Morgan, Wells Fargo and Bank of America have declined by $ 521 billion, compared to the same period of the previous year, which represented the largest decline of this kind in a decade. The figures also showed that the three banks lost $61 billion of this value during the first quarter of this year, that is, until last March.
In fact, the continued depletion in the volume of deposits, up to this point, can be linked to two parallel factors. The first factor is the continuation of the effect of interest increases made by the Federal Reserve, the last of which was on March 23. That increase, which raised the upper limit of the target interest range to 5%, was the ninth increase in interest by the Federal Reserve since March 2022, raising the US interest target to the highest level since 2007.
For US banks, these interest increases usually lead to an increase in the attractiveness of bond markets and their benefits, compared to bank deposits and the benefits they offer. This specifically explains the relationship between higher interest rates and increased withdrawal pressure on bank deposits.
As for the second factor, which is also still driving the erosion of the value of bank deposits, it is the continued concern of depositors regarding the future of American banks and the risks surrounding them. Here, in particular, depositors received the news of the recent increase in interest rates carried out by the Federal Reserve in the month of March, as well as all expectations that indicated that the Federal Reserve is heading towards future increases in interest targeted by it, in order to be able to reduce inflation rates by additional levels. As it is known, all these developments will only mean an increase in pressure on US banks, which is what raises the concerns of deposit holders until now.
The results of deposit erosion are very dangerous
In all cases, the repercussions of what is happening will not be limited to the liquidity crisis that some US banks may face, as a result of the continued bleeding in the volume of their deposits. The pressure of withdrawals would force some of these banks to sell part of their bond portfolios, whose prices in the market have fallen to a large extent as a result of the high interest rates in the market. This is precisely what will incur losses for these banks, as a result of the difference between the nominal value of these bonds, which are supposed to be paid upon maturity, and their current trading value in the market. This scenario is exactly what accumulated losses in the Silicon Valley Bank’s budget, before the storm of withdrawals led to its closure and liquidation.
In short, what happened with the Silicon Valley bank is likely to be repeated with other US banks, as long as the same type of pressure remains, indicative of continued withdrawals from banks and interest rates continuing to rise.
Currently, Bloomberg figures indicate that US bank balance sheets contain approximately $620 billion in unrealized losses, represented by the difference between the value of nominal bond portfolios recorded on the books, and the currently low value of these bonds in the market. Achieving this loss will be possible as soon as US banks are forced to sell these bonds, at the current low market value, as a result of pressure on liquidity and withdrawals, instead of collecting the higher nominal value of the bonds when they are due. This unrealized loss is the time bomb of Western banking systems.
Dealing with the complex Credit Suisse crisis
Contrary to what many thought, the page of the Credit Suisse crisis was not closed, once the acquisition deal was concluded by UBS Bank. According to the initial plans, which were presented by UBS Bank, it is assumed that the merger of the banker will take a long period of time, which may reach up to four years. It was remarkable that the bank indicated that there are great risks related to the expected merger, regardless of the government support that was provided to the acquisition deal. It is clear that the risks that UBS is talking regarding are related to unrealized losses accumulated in the Credit Suisse balance sheet, especially following Credit Suisse has gone through many years of administrative failure, losses, scandals, and the accumulation of risks related to some of the bank’s investments.
It should be noted that Credit Suisse figures, which were revealed yesterday, showed that the bank lost nearly $69 billion of its liquidity during the first quarter of this year, which confirms UBS’ talk regarding the size of the great risks it bears today, as a result of the acquisition. on Credit Suisse. These numbers also confirm the great challenges facing UBS, to retain the main Credit Suisse customers, following the acquisition of the bank. All of this scene indicates that the Credit Suisse file will not be closed soon, pending the clarification of the repercussions of all these developments on the solvency of UBS, the largest Swiss bank.
It is known that the acquisition deal took place under pressure from the Swiss authorities, who tried – in this way – to contain the Credit Suisse crisis before it turned into a banking collapse. This explains UBS’s involvement in this risky deal, without the bank’s shareholders even having the opportunity to discuss or vote on the deal.
It is unlikely that the western banking sectors will get out of danger soon, as long as central banks are still moving towards monetary tightening and interest rates. For this reason, and as the International Monetary Fund recently described it, markets will now continue to “test” the weaknesses of the global financial systems, with every banking crisis similar to the Credit Suisse and Silicon Valley crises. This test is what will determine the efficiency and success of the tools available to central banks to contain these banking crises before they turn into comprehensive financial collapse.
As it is known, the global financial markets today are full of risks, weaknesses and fragility, and everyone will wonder regarding the spark that might ignite the next comprehensive financial crisis. The maximum that every central bank in every Western country wishes today is that this spark not start from its own country.
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