The Financial Stability Board has published a report on depositor behaviour and interest rate and liquidity risks in the financial system. The report draws on lessons from the March 2023 banking turmoil which saw the collapse of several banks, triggered by the confluence of interest rate increases and solvency and liquidity risks. The report identifies life insurers, non-bank real estate investors and banks as most vulnerable to solvency and liquidity risks. These entity types typically have a high proportion of interest rate-sensitive assets and liabilities and are affected by higher rates through various solvency and liquidity risk channels. It also observes that social media may have influenced some of the March 2023 bank runs, along with technological advancements that make it easier and quicker to transfer deposits.
The report finds that the speed of the recent runs means that banks and authorities may need to: (i) be able to react much more quickly to deposit outflows than in the past; (ii) find ways to address the liquidity and solvency vulnerabilities that gave rise to such extreme outflows; and (iii) consider whether monitoring of social media could be helpful as an early warning tool to flag potential stress at a bank or wider turmoil that might affect banks. Consideration could also be given to gathering and publishing data on bank deposits and unrealized losses on bank securities portfolios.
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