US – SVB was an outlier

The bankruptcy of Silicon Valley Bank (SVB) and, shortly thereafter, Signature Bank, shook up financial markets globally. The 2008 banking crisis and its aftermath were still vivid in the minds of most market participants. The reports created uncertainty and fueled fears of a rapid withdrawal of bank deposits and thus a domino effect in the entire banking sector. The US authorities also still remembered the events of 2008 and reacted quickly. The deposits of the affected banks were fully guaranteed and the Federal Reserve provided an additional liquidity channel. The situation then came to a head again when Credit Suisse also faced a rapid and massive withdrawal of deposits, albeit for different reasons than SVB, and was taken over by UBS.

Since then, the situation has calmed down, but reports about the shifting of deposits, especially in the US, are not abating and are still causing uncertainty. However, a look at the figures shows that the initial reactions in the markets came from the surprise caused by the events. Weekly asset and liability data is available for the US banking sector. The most recent data available is from March 15, so it is too early to make a final assessment, but the initial reaction to the turmoil may well have been the strongest. In any case, deposits at commercial banks have fallen by USD 161bn since the beginning of March. This is a decline of 0.9%. At the same time, however, US commercial banks have increased their cash funds by USD 334bn. This means that banks have more than compensated for the withdrawal of deposits, primarily through Fed funds, and now have higher cash balances than before the SVB failure.

Separately, US banks already had high levels of cash before the onset of the crisis. These were equivalent to more than 18 times the above-mentioned deposit withdrawal of USD 161bn. Even without Fed support, the US banking sector thus had a substantial buffer before a sale of government bonds would have been necessary. With the onset of the COVID crisis, there was a sharp increase in deposits, triggered by generous payments from the public sector to households. According to the latest data, the banks held just under 40% each of these additional funds as cash reserves or invested them in government bonds.

On one hand, these figures show that the SVB is an outlier and not indicative of the US banking sector. After all, SVB had to sell government bonds, but this was also due to the strong withdrawal of deposits already before the turmoil, which in turn was based on the bank's customer structure. On the other hand, aggregated data shows just what they are and says nothing about the distribution, and thus does not reveal the weakest links in the chain.

More recent data from the Fed's balance sheet also points to an easing of the situation. Lending from the central bank remained stable as of March 29. This is a clear indication that the shifting/withdrawing of deposits has calmed down and commercial banks do not need any additional liquidity supply from the central bank.

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