According to a working document published by the National Bureau of Economic Research, which offers recessions’ start and end dates, none of the central banks can withstand a bank run for even 30 days.
“According to the updated standards, it seems improbable that any of the six banks would survive a 30-day liquidity crisis. According to Johns Hopkins University economics professor Laurence Ball, this unfavorable conclusion is especially evident for Goldman Sachs and Morgan Stanley.
Six significant banks were examined: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley.
Following the 2017 Liquidity Coverage Ratio (LCR) legislation, they must pass a stress test. Ball says: This guideline compels a bank to run a liquidity stress test frequently. The law requires the bank to evaluate its cash loss under a 30-day stress scenario based on the 2008 financial crisis.
Additionally, the bank must determine its holdings of ‘high quality liquid assets’ (HQLA) that might be promptly liquidated to cover cash withdrawals.
The Silicon Valley Bank’s (SVB) bankruptcy has dominated the news, while countless more banks remain on the verge of collapse.
The share price of First Republic, for example, fell further 15% on Wednesday when Treasury Secretary Janet Yellen abandoned the plan to increase bank deposit insurance.
PacWest Bancorp, a smaller bank with around $30 billion in deposits, dropped 17% in response to Yellen’s statements to Congress, while the index for regional banks fell 6%.
This may imply that the crisis is far from ending, with some focus shifting to the Federal Reserve Bank of San Francisco.
They had authority over the Silicon Valley Bank, yet SVB barely lasted a day, calling into doubt the efficacy of their stress tests.
These smaller banks adhere to various regulations, yet the rapidity with which SVB collapsed surprised many, as one would assume lessons would have been learned from the 2008 financial crisis.
In addition, the world has changed drastically since 2008, when Twitter did not exist and Facebook was used mainly by students. Online banking, let alone mobile banking — no iPhones back then – was somewhat rudimentary.
As we observed earlier this month, the world at your fingertips also applies to bank runs today. However, the working paper does not include these new findings and continues to conclude that a company like Goldman Sachs would not survive two weeks.
The 30-day regulation meant to allow authorities time to react may be inadequate, and the author claims his updated stress test parameters are not even aggressive.
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