By Marc Rubinstein
Everywhere you look these days, people are talking about bank runs. The collapse of crypto exchange FTX; the flood of assets out of Credit Suisse Group AG; the limits on fund redemptions by Blackstone Real Estate Income Trust (BREIT) – they’ve all been characterized as “bank runs” by various commentators. Google searches for the term “run on the bank” are hitting levels not seen since the global financial crisis in 2008.
Thankfully, these aren’t your grandad’s bank runs – or even your aunt’s. They are much more benign than the Panic of 1857, for example, when, according to one account, “Wall Street literally was filled with depositors hurrying to withdraw their funds.” Banks in New York City lost about half their deposits in that episode. A series of cascading bank runs 75 years later contributed to the Great Depression and the failure of about 9,000 institutions. In contrast, this year’s events aren’t really bank runs at all.
___STEADY_PAYWALL___As a regulated bank, Credit Suisse comes closest. After falling victim to viral online rumors about its financial condition, Credit Suisse began experiencing deposit and net asset outflows at the beginning of October. By mid-November, clients had pulled out up to 84 billion Swiss francs ($90 billion), equivalent to 6% of group assets under management.
But today’s regulations mean the group was well equipped to deal with the turmoil — as was the financial system, which saw no contagion. Like other banks, Credit Suisse is required to hold a stock of high-quality liquid assets at least as large as expected total net cash outflows over a stressed 30-day period. As deposits flowed out, Credit Suisse was able to maintain average liquidity coverage 40% in excess of its minimum. As a result, the exodus didn’t become self-fulfilling. “The outflows basically have stopped,” said the group’s chairman, Axel Lehmann, last week. “They are gradually coming back, in particular in Switzerland.”
The Blackstone Real Estate Income Trust has also been able to absorb the impact of outflows. While not a bank, the trust bears similarities by pairing illiquid assets with demand-based funding. The rapid growth of such open-ended investment funds has been a cause for concern among policymakers precisely because of this mismatch. In October this year, the International Monetary Fund cautioned that “in the face of adverse shocks, OEFs that offer daily redemptions to investors but hold relatively less liquid assets are vulnerable to the risk of investor runs (or large outflows) that could force these funds to sell assets to meet redemptions.”
But Blackstone real-estate fund’s structure acknowledges the risk by limiting investor withdrawals to just 2% of net asset value in any month and 5% in a calendar quarter. It was the triggering of these thresholds in November that led to cries of “bank run.” Yet it is precisely these limits that prevented a run from taking hold. As in the case of Credit Suisse, outflows don’t reflect well on the underlying business, but they hardly constitute a run on the bank.
FTX wasn’t even that, though its founder Sam Bankman-Freed sought to present his company’s collapse as an old-fashioned run on the bank. But FTX shouldn’t have sustained any kind of mismatch between its customer funds and its assets, and so should never have been exposed to the risk. The company’s terms of service explicitly tell customers that “title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading.” In FTX’s case, the bank run narrative simply serves as a smokescreen.
It’s timely that among all this attention to bank runs, the Nobel Prize for Economic Sciences should have this year been awarded to three economists for their work on them. In October, the coveted prize went to Ben Bernanke, Douglas Diamond and Philip Dybvig for improving our understanding of the role of banks in the economy, particularly during financial crises.
“Did you know that bank runs – where many savers withdraw money at once – can lead to bank collapse?” the Royal Swedish Academy of Sciences asks visitors to its website. The answer is yes; fortunately they are a lot rarer now than current headlines suggest.
Read more:
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- Sam Bankman-Fried fooled the crypto world and maybe even himself
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