Lecture 6

• Bank contagion occurs when financial distress spreads from one bank to others, often triggering bank runs.
• Bank runs involve a large number of investors attempting to withdraw deposits within a short period.
• The interbank market may collapse as banks refuse to renew loans.
• Banks may need to sell assets (loans) to find new funding sources.
• Bank loans are not easily tradeable, so they may be sold at a discount to attract buyers.
• Significant losses in capital reserves can result, leading to insolvency.
• Impaired confidence in the system may start the same process in other banks, even if they are sound.
• US 2023 bank runs, including SVB, serve as an example of bank contagion.
• Externality refers to unintended social or economic costs/benefits affecting individuals not directly involved in an initial transaction.
• Social costs: banks run leads to payment system failure (cash and deposits), impacting buying/selling and potentially causing job losses.
• Social benefits: efficient payment system benefits everyone, enabling money transfer, credit access, and stable/secure payments.

2023 Silicon Valley Bank (SVB) Bank Run:

• SVB relied heavily on short-term funding from venture capitalists

Silicon Valley Bank Collapse Timeline

• March 8th, SVB announces loss of $1.8 billion and need to raise $2.25 billion.
• March 9th, SVB share decline of 41% and depositors try to withdraw $42 billion.
• March 10th, SVB shuts down by regulators and taken over by the FDIC.
• Deposits are safe
• March 13th & 14th, the FED creates Bank Term Funding Program.
• HSBC acquires SVB's UK arm
• SVB's new CEO urges clients to bring deposits back.
• March 17th, SVB Financial Group files for bankruptcy. March 26th, FCB bought SVB assets.
• 90% of all US venture capitalists holding deposits there
• However, these are flight deposits
• SVB purchased large amounts of long-term US treasury bonds that were not stable causing interest rate risk
• Trump had relieved the regulatory rules allowing for smaller bank (<$250 billion) to not be as regulated, SVB with $200 mn was therefore a part of this
• The fed raised interest rates, SVB's long-term treasury bond values fell leadint to stock prices plummeting.
• Stock prices plummeted, signalling SVB was struggling.
• $2.25 bn capital raise to cover losses caused panic with VCs to withdrawn money.
• Customers withdrew $42 bn in a single day -> bank run
• Signature bank was exposed to tech startup and crypto firms consequently also collapsed
• The US government stepped in the guaranteed deposits, even over $250,000 to prevent further contagion.

Credit Suisse

• Credit Suisse went bankrupt due to its collapse to SVB in Europe.
• Involvement in series of scandal before bankruptcy
• Rights offering to Saudi National Bank not accepted, signalling poor financial loss lead to stock plummeting
• UBS agreed to buy it avoiding further contagion

Similarities between Silicon Valley Bank and Credit Suisse's

• Both companies suffered due to rapidly changing which weakened confidence to stay solvent.
• Both companies had loss of confidence to their share prices.
• Uncertainty spread from US regional banks to both companies.
• Poor risk assessment in investments and lack of monitoring contributed to the crises.

Case Details of Silicon Valley Bank

• Rising interest rates caused in forced bond caused SVB to withdraw in losses
• Long-term bonds increased interest rates
• Failed to maintain its position to deposits and withdrawals caused problems to surface unexpectedly.

Additional Details of Credit Suisse

• Financial pressures caused by poor performance and scandals
• SBR prevented Sadi National Bank leading to withdrawls
• Collapse of SVB triggered downfall

Consumer Protection

Caveat emptor: the buyer checks if what she buys is suitable for the purpose Rule works for simple products but complex systems it gets harder to investigate the health of the bank

• In modern financial systems, banks are looking to maximize number of customers
• However government wants customers to suffer particularly to poverty, elderly and financial unsophisticated
• SVB was mostly used by CFOs but the government could not let these companies fail as internalities would become too large

Regulatory bodies

• Europe: Harmonized within EU single market with nation legislations based on EU directives
• Europe: ECB and EBA, and Deposit Insurance Institution
• Includes DGF Finland and FDIC US
• International G-20, and Basel Committee on Banking Supervision
• Securities commission: Regulate primary and security markets Includes European Securities and Markers Authority
• Includes Securities and Exchange Commission in US.

Bank regulations covers

• Structure and activities of banks, Bank and Transparency, bank capital adequacy

Structure and activities of banks

• Glass-Steagall Act: banks cannot involve with brokerage or insurance, cannot take deposits ensuring separating investments
• Follow a period of deregulation.
• EU: 2nd banking financial service
• Before the GFC, Banks can move more like EU
• Dodd-Frank Act
• A wall street protection signed by Obama
• The important rule is Volcker Rule which reduces banks to take exclusive risks to take
• 2017: Trump promised to trim regulations and sign a bill that is reduced
• Under the idea that the collapse woudln't lead to bring economy down
• Regulation increases administration
• Proprietary Trading: a bank trades on its own rather than for behalf Europe had proposed similar trading like in the US

Liquidity

• Banking operations are mainly finance using deposits
• Banks need to keep liquid assets to keep for demands
• Govermenty safetly net is in place of to protect for liquidity risks
• Basel II, LCR and NSFR
• Liquidity Coverage Ratio: Quantity of high is used to acute stress

• =100% short-term liquidity risk

• Regulatory ratio to ensure banks profile relative to other things
• 100% Available stable funding: portion of capital and liabilities NSFR, 1 year
• Manage for risk
• Liquid is monthly using the short and long

Transparency

• Financial market described as consumer marketing.
• System consumer buy
• Used to show product
• Wells Fargo opened names for client
• A result ended up their head

Adequacy

After GFC, It becomes priority for banks to have enough capital. Domino and economic lead by one Bank. Banks adopted regulators by base committee Additional banks financial disruption Capital varies between. Other institutions: O-SIIS

Finland

There is magnitude of additional buffer, which are set by the FSA. There a drastic increase in the amount of capital requirements

• There too much revenue. There had been increased dividend purchases Banks should cut and use things Regutors for economic companies. There are complaining with complexities.

Costs of regulation

Costs of governments: to feel protect Excessive risk

• Make to behave
• Take more otherwise GFC, fail, but has can't fix

This material covers the collapse of Silicon Valley Bank (SVB) and the acquisition of Credit Suisse by UBS. It addresses the factors leading to these events, government intervention, and the role of regulatory bodies. It also explains why depositor protection is so important.