Lots of bad things can happen to banks
Their customers can pull their money out (a liquidity crisis).
Their borrowers can fail to repay their loans (a solvency crisis).
Their shareholders can sell their stock, sending their shares down (a confidence crisis, making it far harder for them to raise money).
And beyond true crises, changes in economic and financial conditions can attack their profits — which is bad for shareholders and ultimately might tend to imperil everyone connected to the bank.
All of these things are conceptually separate, although in practice they will often affect each other.
So far this year, those problems are almost entirely about deposits, almost entirely from relatively small banks, with the money flowing in part to the larger institutions
Earlier this year, the returns available in the bond market somehow became irresistible, and started pulling money out of deposits.
So this is an extreme and novel situation to the extent that the current post-Depression system has never been subjected to this test before. (It’s been subjected to other tests, of solvency, most critically in 2008, but not to a crisis concerning deposits.)
How does this turn into something much worse?
The greatest problem would come if banks’ solvency came into question — if there were reason to doubt that their loans would be repaid.
And the area of greatest concern here, as Points of Return has pointed out before, is commercial real estate.
As aversion to commuting and preference for working from home grow embedded, so logically the demand for office space will reduce as companies work out ways to retrench.
That could create difficulties for those who fund them.
John Authers Bloomberg 27 mars 2023
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