Apps and online investment services have led to a new type of consumer behaviour. Bank runs go viral, introducing a new type of liquidity risk for banks and investment services. The ECB warns the threat may not be ignored.
Joe Vezzani is CEO and founder at California-based Lunarcrush, which calls itself a “social intelligence company”. The company gives retail investors access to tools similar to those used by professional investors, which also track threats and opportunities presented by social media in today’s financial markets.
Lunarcrush aggregates social media data and links it to specific movements in stocks and crypto currencies, looking for specific mentions of company names and NFT collections. “We’re here to bring institutional level insights to the retail investor. These are the kind of tools that institutions have had for a long time,” Vezzani said.
As shares in Silicon Valley Bank began to slide, Vezzani’s tool had already picked up a steep increase - 234,000% - in social media chatter. “For some hours zero people were posting on social media about Silicon Valley Bank. And to go from that to millions of engagements, in a matter of hours, that tips you off to something that’s happening here.”
It was the beginning of a bank run in which SVB’s depositors sought to withdraw 42 billion euro in the space of a few hours, which eventually led to the bank’s collapse.
“Retail can have a big impact on what’s going on. What we’re trying to do is to democratise this, so the average everyday person can now get insights like, hey, there’s a bank run happening at Silicon Valley Bank and they can protect themselves just like the institutions can,” said Vezzani.
However, the democratisation of real-time investment information comes at a significant cost.
Liquidity
“Be prepared for the effects on liquidity of rapidly spreading turmoil in combination with the ability to act immediately,” says a portfolio manager at a Swiss asset manager who asked not to be identified.
“Savers generally understand little of what is going on, so they choose the safest option; following the rest of the mob. That causes flows from the banking system into money markets,” the portfolio manager says. “When money is withdrawn from deposits and put into money market funds, it means that all ratios deteriorate. There will be no more funding available for liquidity.”
Programs are now being made available to banks that need to exchange their collateral for cash. One example is the Fed’s buying program where HTM-bonds can be traded for liquid securities at par. Between Europe and the USA, daily liquidity in dollars has been stepped up as a program. In Switzerland the Swiss National Bank guarantees liquidity.
“Those are all signs that liquidity is the number one focus now, but those buying programs only work for the short term,” says the portfolio manager. “Once the stretching of liquidity buffers comes to an end, other financial institutions will have to buy up banks› long-term investments and loans to make them liquid. Large losses will be incurred on the sale of those illiquid portfolios.”
“On paper, liquidity looks all nice, but in practice, it’s grossly disappointing.”
Changing consumer behaviour
Several other moments in recent years have also demonstrated that the changing behaviour of consumers can have consequences in terms of liquidity, also for investment funds.
It was March 2020, at the onset of the Covid-19 pandemic, when open-ended investment funds all of a sudden had a liquidity problem. Close to 80 investment funds with 40 billion dollars under management could not immediately respond to redemption requests when investors suddenly began withdrawing their funds.
During February and March 2020, for a number of weeks, investors - and with them regulators and supervisors, including the International Monetary Fund - collectively held their breath as share prices plunged across the world. After a number of black trading days, markets calmed after governments worldwide acted and presented relief programmes, injecting fresh capital into the economy.
Financial regulators in Luxembourg joined other European regulators in asking asset managers for large amounts of information about their ability to repay investors, basically seeking assurances on liquidity. If the money is not there when investors sell, there’s a problem.
Considering lessons learned from the March 2020 crisis, regulators, including the CSSF, identified the need for additional risk tools to reduce the systemic risks associated with widespread withdrawals from open-ended bond funds. It’s been defined as a potential systemic risk at the level of the Basel-based Bank for International Settlements.
‘Banks need to capture shifts in behaviour’
The European Central Bank also has raised questions on the effects of changes in consumer behaviour and how these affect the nature of deposit withdrawals. In the age of social media, billions can be withdrawn within hours, with direct consequences on a bank’s balance sheet, as was clear from the bank run on Silicon Valley Bank.
“The models banks use to manage assets and liabilities… don’t capture the shifts in consumer preferences and behaviours that typically take place as rates rise, such as deposit withdrawals,” the ECB’s chief bank supervisor Andrea Enria wrote in a 20 December blog post.
Enria placed his observation specifically into the context of rising interest rates. A massive switch to savings accounts at another bank that pay more interest also can also affect a bank’s liquidity position.
In March 2020, some 76 investment funds with 40 billion dollars of assets under management could not immediately respond to redemption requests in March. These funds - mainly UK real estate funds and Scandinavian high-yield bond funds - had to temporarily halt trading.
The International Monetary Fund at the time warned that asset managers could come under additional selling pressure if market conditions were to deteriorate further, calling on regulators to ensure that fund managers make full use of liquidity management tools.