As Safe as Houses!

Insights by Peter Watson.

I remember clearly being told at an early stage in my career (by one of my accountancy tutors) not to trust the solid looking edifice of the banks. Their business model is inherently risky – at its most basic: receiving money for short term deposits and lending on long term.

If the customers en masse want to remove their money you have a liquidity crisis – or a “run on the banks”.

That said, most of the time people don’t. We have to keep our money somewhere so provided the bank is not considered “at risk” all is well.

We have been reminded of this with the recent fall of Silicon Valley Bank (SVB) in particular. A number of our clients bank with SVB and they had worrying time until HSBC stepped in at the brink.

In this case it appears that SVB invested deposits in slightly longer-term bonds, whose price fell sharply as interest rates rose. As analysts questioned this, customers started to withdraw their money and the bank had to sell the bonds at a substantial loss, further adding to its woes. There have been comments in the press that this policy improved short-term returns, and hence management bonuses, but that is for another time!

We have also had the troubling scenario of Credit Suisse being sold in a weekend to UBS. Whenever a £7bn deal gets done this quickly we should be worried! Credit Suisse’s woes stretch back longer, but once confidence goes, the inherently risky banking model is exposed.

So how might this affect the UK market for Mergers and Acquisitions? Any tightening of the liquidity rules for banks will reduce the ability of the banks to lend. At present we believe that the banks are generally in much better shape than in 2008 and do not expect this to have a direct impact. However, it is certainly not welcome and is a stark reminder that despite the imposing concrete and glass towers, banks are not quite the safe havens they’d like you to think!

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