It becomes problematic when individual banks lose the trust of their depositors.
(Photo: dpa)
“Consider what you wish for, because you could get it”: This English proverb applies to the current situation of German banks. After years of complaints about low interest rates, the European Central Bank (ECB) raised them by three and a half percentage points in just eight months.
No wonder that after the collapse of Silicon Valley Bank and Credit Suisse, the question is asked whether a crisis like in 2008 could repeat itself. The good news: Unlike then, there are no problems with non-performing loans and bonds from the real estate sector. In addition, the equity base of the banks is significantly better.
The current challenge lies in the combination of high maturity transformation and the abrupt rise in short-term interest rates. Maturity transformation is a core function of the banks: when a bank grants a real estate loan with a term of ten years, in return for the long-term debt, it provides the borrower with a balance in his checking account, which he can use in the short term. As a rule, the interest rate on the mortgage loan is higher than the interest rate on the deposit, the so-called demand deposit, which means that the bank earns interest income.
After the phase of low interest rates, maturity transformation is at a “high level” according to the Bundesbank’s stability report. The share of sight deposits due on demand in bank refinancing has been increasing for years, while the share of longer-term debt securities is falling.
Long-term, low-interest loans dominate on the assets side of balance sheets. For their real estate loans to private households with a volume of 1.6 trillion euros, the banks only receive an average interest rate of 1.8 percent. For loans to companies (1.3 trillion euros) it is 2.5 percent. Only consumer loans (EUR 0.5 trillion) look a little better at 4.0 percent.
Run on deposits became the Silicon Valley Bank’s undoing
It becomes problematic when individual banks, as in the case of Silicon Valley Bank or Credit Suisse, lose the trust of their depositors and there is a massive withdrawal of deposits. A bank could then, if at all, only refinance itself at the currently high interest rates.
How could such a run on deposits be prevented? A solution that is currently being discussed in the USA would be the temporary expansion of the state deposit guarantee, which is limited to EUR 100,000, or even an unlimited guarantee.
In any case, the cost to the taxpayer is likely to be less than the cost of bank failures. Banks and supervisors would thus gain time to reduce the maturity transformation in the balance sheets in an orderly manner.
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