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Global rules on how much liquid assets banks should have need to be adjusted in response to last year’s collapse of Silicon Valley Bank and rescue of Credit Suisse, international regulators have said.
The world’s top banking supervisors pledged in a report published on Friday to examine ways to strengthen liquidity rules for the sector after identifying several areas where they fell short in last year’s crisis.
“Liquidity supervision may need to evolve in light of recent experience,” the Basel Committee on Banking Supervision, which sets global regulatory standards for the sector, said in a report to the G20 group of industrialised nations.
Over a fortnight in March 2023, banks with total assets of about $900bn were shut down, put into receivership or rescued — including Silicon Valley Bank, Signature Bank and Credit Suisse. A few weeks later, First Republic Bank was closed with nearly $230bn of assets.
The speed of the upheaval that swept through the banking sector last year left regulators questioning whether the rules they agreed to shore up the sector after the 2008 financial crisis were working as intended and if they needed improving.
“All of the distressed banks during the 2023 banking turmoil experienced a series of liquidity shocks,” the committee said. Even though many of the banks hit hardest were not subject to global rules, the regulators said “the turmoil raised questions about the design and calibration of the Basel III liquidity standards”.
The Basel committee said last year’s turmoil also exposed “the role of social media and the digitalisation of finance in hastening the speed and impact of a bank’s distress”. It suggested that regulators could require banks with a “structural high-risk liquidity profile” to report their liquidity positions more often.
In particular, the report said the problems at Credit Suisse before its rescue by rival UBS had revealed how a bank could struggle to sell liquid assets to pay depositors when they rush to pull their cash out.
The Basel regime requires global banks to have at least enough assets that can be easily sold — such as central bank deposits — to cover 30 days of net cash outflows during a hypothetical stressed scenario.
Credit Suisse comfortably met this requirement until shortly before customers pulled out almost a quarter of its assets in only a few days and pushed it to the brink of collapse.
The bank turned out to be unable to sell many assets it had identified to cover this requirement either because they were reserved for other purposes, such as daily liquidity needs, or because they were difficult to transfer to the entity where they were needed.
The report said Credit Suisse was also reluctant to sell its liquid assets because this would have taken it below the required level and triggered a need to disclose this to investors, which could have further eroded confidence in the bank.
Another problem it identified at the failed US banks, such as Silicon Valley Bank, was that they were reluctant to sell many liquid assets they had to deal with potential cash outflows because this would have forced them to crystallise unrecorded losses.
US banks were accounting for these assets, such as government bonds, on the basis they would be held to maturity. This meant they did not have to take losses when the assets fell in value, unless they were sold.
The banks seemed to assume they could cash in the assets via repo markets — in which they are pledged as security for a loan. But the report said “in such scenarios repo markets may stop functioning smoothly” making them “an unreliable source of contingent liquidity”.
The Basel committee said it would continue “prioritising work to strengthen supervisory effectiveness and identify issues that could merit additional guidance at a global level”.