NYU Stern Economics Professor Lawrence J. White spoke on Yahoo Finance about UBS’s takeover of CSFB. According to him, Credit Suisse has been mismanaged over the past fifteen years. If something like this occurs in the common companies, it is a problem for its shareholders, sometimes even for its employees. In the case of banks, however, the consequences may be broader, as they are part of the entire banking system. International banks then influence the global system.
Yahoo Finance carried an interview with the professor under the title “Banks are very fragile”. However, White spoke of the vulnerability if savers who have deposits with the bank and other creditors “start to get nervous”. Subsequently, the “financial structure of such a bank” falls apart. A recent example of this happening is Silicon Valley Bank, which lost over $40 billion in deposits due to said nervousness.
In the case of Silicon Valley Bank, there was a so-called run on the bank, when there is an outflow of deposits, which increases the concern even more and the whole spiral turns more and more. In addition, the professor reminded again that banks are concerned with the stability of the entire financial system and thus differ from ordinary banks companies. This is doubly true for banks such as Credit Suisse, which has $500 billion in assets under management and is the second largest in Switzerland. If its creditors are “running”, the Swiss government “must do something”.
According to the professor, banks are complex businesses and basically none of the savers who have a deposit with them is able to correctly estimate their financial strength. This can contribute to contagion, where one bank’s problems raise concerns about the safety of deposits in others. The problem may not be direct relations between banks, but tensions may spread purely because of the described mechanism.
White described the necessity of a sufficient amount of equity capital. This represents the difference between the value of assets and the value of liabilities. The higher the value it reaches, the more resilient the bank should be. To this, the expert added that if he were a shareholder of the bank, he would be interested in the amount of capital so that he does not face too much risk. If he had a deposit with the bank, he would rather be interested in whether and to what extent his deposit is insured. Including whether there are any limits on the amount of the insurance and how quickly he could get to his money in the event of a problem.
Being a shareholder is therefore different from having a deposit with the given bank. “At the end of the day, both groups are interested in the financial strength and resilience of a bank or other financial institution,” concluded the professor.
Source: Yahoo Finance
