From Breakingviews - How post-2008 bank rules led to a 2023 problem
and Silicon Valley Bank. Fifteen years ago, it became clear that lenders’ habit of funding themselves generously with fickle, short-term borrowing from financial investors had become a problem. Doing so had helped to sink firms like Lehman Brothers and Northern Rock. So regulators
their toolkit, encouraging banks to lean on supposedly sticky sources of cash, like the money households and companies keep in their accounts.Tinkering with the ecosystem promoted a period of calm, but has created unintended consequences. Corporate and wealthy depositors turn out to be flighty after all. Silicon Valley Bank’s technology-heavy customersto withdraw $42 billion in a day.
Regulators will once again rethink their toolkit, but previous pest-control techniques won’t work this time. After the last crisis, the Basel regulations told banks to keep enough liquid assets to cover all their wholesale funding, as if every penny might be called on at once. For corporate deposits that exceed national deposit guarantees, theyReuters Graphics
The logical thing would be to raise those coverage ratios to 100%, or something like it. That’s the equivalent of culling the deer that have run amok across Britain’s countryside. But if regulators started asking banks to back those deposits 100% with liquid instruments instead of loans, the amount of cash they’d have to hold would leave them little room to lend into the economy.
There’s no easy answer, and the problem is urgent. Online banking has made it easier for customers to pull cash, and social media amplifies financial panic. It’s clear that deposits can go quickly from friend to foe. But regulators and politicians ought to remember that eliminating predators brings new problems. Better to live alongside them, understand how they behave, and be prepared to lose the odd sheep.
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