Liquidity eating big into the banking sector
A Silicon Valley Bank office is seen in Tempe, Arizona, on March 14, 2023.
Silicon Valley Bank (SVB), the 16th largest bank in America and which focused on the California technology sector, was closed before its branches opened on March 10 after customers withdrew most of its deposits.
Effects of liquidity concerns in the banking sector spread and two other banks focused on cryptocurrencies also closed.
SVB's UK business was sold to HSBC Bank for £1 in a deal brokered by the Bank of England and this morning, the 167-year-old Credit Suisse is being merged, at a fraction of its value, with a fellow Swiss bank, UBS in a government-brokered deal to restore confidence in that country’s banking system.
Can similar bank crises happen in Kenya and how should they be managed?
Bank runs have similar characteristics. Strong banks usually benefit as customers withdraw funds from small banks to bring them to the perceived safety of larger banks.
Banking is about confidence and when that vanishes, regulators must move to restore it before the panic spreads to other banks.
I was fortunate to come across "Kenya's Tax Czar," the autobiography of Michael Waweru, who is most famous for being the Commissioner General of the Kenya Revenue Authority. In the book, which was partly serialised by the Nation, he candidly writes about auditing banks and the delicate matter of communicating bad news.
He advised KCB on how its directors could break some bad news to shareholders in 1999 about heavy provisions and a profit drop, telling them to cushion the blow by announcing a leadership change.
The bank did that and there was no run on deposits. He also writes about Trade Bank, which ran into trouble in 1993 after which he was appointed statutory manager.
Even though its owner put in Sh200 million, as part of a deal to restore confidence in the bank, its customers still panicked and withdrew all that cash in one day.
A few years later Waweru had his own experience with bank runs, this time as a customer. His new business banked with entrepreneur-friendly Chase Bank which was run by his friends.
Waweru’s fellow directors heard rumours about the bank and pushed him to move their funds out. He was reluctant to do this and called the bank Chairman who assured him that all was well and not to panic.
But, in the digital age, you don't see many queues at the branch of a troubled bank, as customers can initiate transactions from their phones and homes to divert funds.
Waweru agonised over his decision and signed the paperwork to get some of their funds out before Chase collapsed.
Regulators should make decisions for the majority who are the depositors. On a Twitter Chat this week by Mwango Capital, investment banker Sunil Sanger spoke about bank runs in Kenya.
He said that, since the collapses of Imperial Bank and Chase Bank, the CBK has been more responsive and has nurtured weak banks into merger deals to protect their customers and depositors.
These included Fidelity to SBM, National Bank to KCB, Jamii Bora to Coop and Spire to Equity Bank.
Not everyone will be happy in a rescue deal. Shareholders lose their investments and are sometimes blacklisted, prosecuted, or shunned for mismanaging the funds of their friends.
Also, for bank employees, layoffs often follow to reduce the duplication of systems and branches after a merger deal.
So, what can customers do? Don’t put all funds in one bank.
Also, don't burn bridges with any bank, forge strong communication relationships with bankers, and read all bank documents before signing them.