MNI: Banks Need More Reserves For Covering Runs: G30

Banks need to ensure capital levels are high enough to guard themselves and taxpayers against breakdowns such as Silicon Valley Bank and Credit Suisse, the G30 group led by former New York Fed President Bill Dudley said in a report Tuesday.

The changes needed to bolster the banking system after last year's regional bank failures would have only a modest impact on healthier institutions, with only weaker ones needing significantly bolster collateral, the report said.

“The reformed LoLR (lender-of-last-resort) changes proposed here would entail banks prepositioning enough collateral to cover, after the normal haircutting for credit risks, all runnable liabilities—that is, all liabilities excluding capital, long-term debt, swap liabilities, and insured deposits,” according to the paper.

The risk of bank runs has grown as mobile accounts permit faster withdrawals, and in the U.S. uninsured deposits now account for 43% of all deposits versus 20% in 1990, the G30 report said. That represents USD7.5 trillion of the USD19.6 trillion in runnable liabilities in America’s financial system. Still, insuring more deposits comes at a high cost to governments and creates the risk of moral hazard from banks. (See: MNI INTERVIEW: Global Banks Over-Levered- Ex Basel Head Ingves)

The paper comes with contributions by former central bank chiefs Mervyn King from the BOE; Axel Weber from the Bundesbank; Zhou Xiaochuan of the PBOC and Masaaki Shirakawa of the BOJ. While the findings may guide officials studying the 2023 bank failures and the Treasury squeeze of a few years ago, calls for higher safety margins are often opposed by major U.S. and European lenders.

The findings are a reminder that the pledge to prevent “too big to fail” banks and create “living wills” to help unwind failing lenders following the 2008 financial crisis is incomplete. The causes of last year’s failures also echoed past weaknesses in banking and regulation, the report said. U.S. banks remain reluctant to use facilities such as the discount window, and there is a similar stigma elsewhere, the G30 reported.