A stable, well-functioning financial market for allA stable, well-functioning financial market for allFI Analysis No. 47: The 2023 Banking Turmoil – Could What Happened in the US and Switzerland Also Happen in Sweden?
During the spring of 2023, one Swiss bank and several US banks failed. Multiple actors in both the US and internationally have analysed the underlying causes. We summarise the findings of these reports as follows: there was a lack of internal governance and control, there were deficiencies in the supervision, and several of the banks were not fully subject to the Basel regulations.
Our conclusion is that these conditions together led to the build-up of a number of vulnerabilities: poor profitability, high interest rate risks, unrealised losses on bond holdings in the liquidity reserve, concentration risks in deposits and lending, and a high percentage of deposits that were not covered by a deposit guarantee scheme. Spurred on by digitalisation, events unfolded very quickly. For example, Silicon Valley Bank, one of the affected US banks, lost 85 per cent of its deposits in only a few days.
Some Swedish banks display several of the vulnerabilities mentioned above, but none of the Swedish banks have the same general risk profile and combination of vulnerabilities as, for example, Silicon Valley Bank. Swedish banks must hold capital to cover their interest rate and concentration risks, and the differences between the carrying amount and the market value of Swedish banks' bond holdings are small, which prevents the build-up of such vulnerabilities.
In general, a high percentage of the Swedish banks' deposits are also covered by deposit insurance. It is mainly the major Swedish banks that have a greater part of their deposits uninsured, but on the other hand, they have good profitability and higher resilience. Therefore, there is a limited risk that Swedish banks would experience a bank run like the one that occurred in the spring of 2023. The lessons learned from the banking turmoil also indicate that deposit insurance contributes to the prevention of bank runs. However, if a bank is heavily reliant on uninsured deposits, it needs to be well managed and not take undue risks that undermine the confidence of its depositors.
