The chart below is the IAWL Indicator. It shows Google Trends search interest from the UK in It’s a Wonderful Life (1946):
As demonstrated, seasonality is a factor. More interesting, perhaps, is search performance excluding November to January, when there’s only ever a baseline level of international interest in an All-American Christmas family staple.
The bit we care about in the above chart is the tick higher in March 2023, where UK IAWL search interest hit a seasonally adjusted record high. Presumably, this was caused by English-speaking readers chancing upon alarmist articles about the nature of bank runs that reference the plot of a 77-year-old movie they’ve never seen.
For completeness we should note, however, that IAWL benchmarked against The Muppet Christmas Carol (1992) shows interest in both films spiking to seasonally adjusted record highs. An alternative reading is that Britain has been belatedly festive of late. Whether the IAWL Indicator measures perceptions of banking system stress or broader consumer sentiment has yet to be determined.
All of which is a shameless bait-and-switch way to introduce yet another post about bank capitalisation.
SG Securities has a note out today that puts some historical context on the recent deposit flights and asks what it might mean for liquidity requirements. Analyst James Invine says:
We estimate that doubling deposit outflow factors (a tough assumption) would cut the sector’s liquidity coverage ratio (LCR) from 142% to 82% and would require the sector to raise €2.6tn of funding to return to 110%. The direct impact would be to cut sector earnings by 5%, although the tighter resulting LCR would likely also put upward pressure on deposit betas.
Much has been said and written already about silent bank runs of 2023, how friction-free online banking has combined with hysterical social media, and how it contrasts with the queues outside branches during the GFC. Northern Crock remains the collapse against which all others must be judged, but the speed and depth of recent runs hint at a digital Crock-isation of the wider sector:
The risk of malicious actors taking advantage of these vulnerabilities — such as by weaponising panic or spoofing illiquid single-name CDS — is a concern regulators have acknowledged. The likely outcome is a toughening of the liquidity coverage ratio, which measures the amount of high-quality liquid assets a bank holds relative to estimated stressed net outflows over a 30-day period. Banks must maintain an LCR of over 100 per cent. See Robin’s post earlier this week for a full explainer.
The problem with mandatory liquidity ratios is that depositors don’t care. Credit Suisse had an LCR of 192 per cent, yet two badly chosen words still caused a big chunk of its deposit base to disappear.
Unfortunately, the alternative measures are probably worse. A more generous bank state deposit guarantee would come with moral hazard and unquantifiable potential liabilities. Radical reform, such as allowing direct deposits with the Fed or limiting access to money market funds, would be too disruptive to too many livelihoods. Likewise central bank digital currencies. So, LCR it is.
But when trying to figure out how to make the existing run-risk ratios work better, inconsistent balance sheet disclosure is a problem.
Using stable retail deposits as a proxy for funds covered by state guarantees probably overestimates the flight risk from banks with big brokered deposit franchises, such as Morgan Stanley, and from those with single-purpose high interest retail accounts, such as Goldman Sachs and Paragon:
Invine suggests instead to reference each bank’s weighted average deposit outflow factor, which is a metric already built into LCR calculations. Because in the average month SEB depositors pull out more money than Paragon depositors, the former needs to hold more liquidity than the latter to maintain the 100 per cent ratio:
His base case involves a doubling of the deposit outflow assumption and a raising of the LCR threshold to 110 per cent, leaving a €2.6tn hole that would need to be filled.
The direct cost of tapping wholesale markets for money to park at the local central bank would on average cut 2024 net profit by about 5 per cent. Some of that drag could be offset by running smaller balance sheets with cleaner deposit mixes, the compulsion for which is the main justification for changing the rules. But it comes with the significant catch of severely restricted loan growth and higher fed funds pass-through rates to depositors:
Banks have been able to allow much of the benefit of rising rates to feed into net interest margins because strong funding positions mean that a little deposit outflow isn’t a significant problem. At a 110% LCR, however, banks would feel significantly less able to withstand this and so deposit betas would likely rise.
The worst affected in SG’s analysis would be banks with very large and/or uninsured corporate deposit bases. For Citigroup, HSBC and Standard Chartered, 2024 consensus net profit would be cut by between 10 and 14 per cent. Citi also has one of the widest liquidity gaps to close:
Anyway, back to the IAWL Indicator.
The recent peak for Google UK search interest in It’s A Wonderful Life was on March 10, the day SVB failed. It has since levelled off to its long-term seasonally adjusted average, both on an absolute view and relative to The Muppet Christmas Carol:
Changes to bank liquidity requirements as outlined above would take forever to agree, twice as long to implement, and potentially an eternity to have any effect on depositor behaviour. Collective confidence is the only backstop that matters.
So, when taken in combination with the recent slowdowns in money-market fund inflows and US bank liquidity infusion measures, a normalised IAWL can be read as a positive. No bank is a failure that has friends.
