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No one has ever accused the Federal Reserve’s research division of working too quickly. Delayed findings can still be interesting, though.
Take this recent paper, which reviews the US’s regional bank run in March 2023. For readers who were following Alphaville’s coverage at the time, some findings won’t be terribly surprising: It was mostly large depositors who pulled their funds, meaning companies and investors rather than individuals. And they yanked cash from banks with weak balance sheets.
But this bit of information did stick out:
We . . . identify twenty-two banks that suffered a run, significantly more than the two that failed but fewer than the number with large negative stock returns. The runs were driven by a small number of large depositors and were related to weak balance-sheet characteristics.
Twenty two?! That sounds like a lot of banks.
The US is still highly banked, of course, raising the question of whether these banks were just small community banks that no one would miss.
But, uh, seems like the answer is no:
However, we find evidence for the importance of co-ordination because run banks were disproportionately publicly traded and many banks with similarly bad fundamentals did not suffer a run. Banks survived the run by borrowing new funds and raising deposit rates, not by selling securities.
The smallest and weakest US banks can’t really raise capital in public equity markets, as a general rule.
To illustrate that: There are 203 banks in the S&P Total Market Index, according to FactSet. That’s less than one-tenth of the 2,151 large commercial banks as of September 30, by the Federal Reserve’s count.
Indeed, the public markets seem to be thoroughly unfriendly to large stressed banks like SVB. Remember, it was a strange capital raise that started the whole thing.
So to finance their customers’ withdrawals, the other banks borrowed instead, primarily from the Federal Home Loan Banks, the paper finds (we also covered after the fact).
Over at Liberty Street Economics, the paper’s authors highlight the fact that publicly traded banks experienced the worst of the withdrawals, and said they’ll address the role that public information — the media, even — had on fuelling bank runs in a future blog post.
But for now, it seems notable that 20 other banks experienced runs without failing. And they were saved by existing government financing, not a special facility or discount-window expansion.
