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No one has accused the Fed’s research arm of moving too quickly. However, it can be interesting even if discovered late.
Take this recent paper reviewing the March 2023 US local bank run. For readers who followed Alphaville’s coverage at the time, some of the findings won’t come as much of a surprise. Those who withdrew funds were primarily large depositors: businesses and investors. Not an individual. And they withdrew cash from banks with weak balance sheets.
However, the following information caught my eye:
we . . . We identified 22 banks that were hit by bank runs. This is significantly more than the two banks that failed, but less than the number of banks whose stock prices have fallen sharply into negative territory. This run was driven by a small number of large depositors and was related to the weak characteristics of the balance sheet.
twenty two? ! Sounds like a lot of banks.
Of course, the United States is still highly banked, and the question arises whether these banks were just small regional banks that no one would miss.
But the answer seems to be no.
However, we found evidence of the importance of coordination. This is because the banks that were run were disproportionately listed, and many banks with similarly bad fundamentals did not suffer from the run. Banks survived the financial crisis not by selling securities, but by borrowing new funds and raising interest rates on deposits.
The smallest and weakest banks in the United States are, as a rule, unable to actually raise capital on the public stock market.
To illustrate, the S&P Total Market Index includes 203 banks, according to FactSet. That’s less than one-tenth of the 2,151 large commercial banks as of Sept. 30, according to a Federal Reserve tally.
In fact, the public markets appear to be completely unfriendly to stressed large banks like SVB. Remember, it all started with some weird funding.
As a result, other banks instead borrowed, primarily from the Federal Home Loan Banks, to fund customer withdrawals, the paper found (we also interviewed them after the fact).
In Liberty Street Economics, the paper’s authors highlight the fact that publicly traded banks have experienced the worst withdrawals, and will discuss the role of public information (including the media) in fueling the run in an upcoming blog. He said he would address it in a post. .
But for now, it seems worth noting that 20 other banks have experienced failure without failing. And they were saved by existing government loans, not by special equipment or expanded discount lines.
