The deposit stability nexus

One of the main fears stalking banking at the moment is whether banks have enough liquidity at hand to handle quicker-than-expected deposit outflows without having to dump assets at a loss.

Under the post-financial crisis Basel rule book, banks are supposed to have enough high-quality liquid assets to handle at least 30 days of elevated deposit flight — what is known as the ‘liquidity coverage ratio’.

But the speed of the outflows that struck Silicon Valley Bank and Credit Suisse seems to have made investors skittish that LCR assumptions are too sanguine, so Jefferies’ analysts have taken a closer look. When it comes to the European banks at least, they come away reassured.

The overarching research conclusion is that post GFC short term liquidity regulations appear to be working as intended. Irrespective of investors’ current & partial lack of faith in LCR ratios, our analysis shows: 1) the median European bank could in theory sufferer a loss of 38% of its deposits without having to face significant risk to capital via losses on HTM securities or fire selling illiquid assets; 2) retail deposits comprise 63% of the median bank’s deposit base, an important source of funding stability.

Here is the rundown of the various metrics for individual European banks covered by Jefferies. (Zoomable image here)

For a more visual representation of who is fine and who is a bit more mixed, here’s Jefferies’ scatterplot of the data (Zoomable image here)

Given that the theoretical 30-day outflow figure used for LCRs is based on assumptions that may no longer be valid, the bank’s analysts looked primarily at their holdings of HQLAs versus deposits, to see what percentage of depositors could theoretically flee without having to crystallise losses by selling underwater assets.

Banks in the upper right quadrant have a higher than average proportion of both high quality liquid assets/deposits and household deposit concentration. Those in upper left quadrant (with a lower than average proportion of HQLA/deposits but higher levels of household deposits) tend to be slightly more mortgage-heavy but retail deposit-rich banks like Lloyds.

In the bottom right quadrant are banks with high levels of HQLA/deposits but lower levels of retail deposits, such as BNP Paribas, Barclays and HSBC, which are strong commercial banking players with lots of corporate deposits.

Finally, in the lower left are banks like BBVA and Santander (and Standard Chartered is very nearby) that screen “less favourably” by these metrics, but Jefferies notes that they are all unusually diversified geographically.

But will this be enough reassure skittish investors? European bank stocks have edged higher this week, so hopefully so. But as long as the US banking system remans under pressure it will be hard for the current nervousness to pass.