The Next Crisis to Hit Markets May Be About Liquidity

Individual financial institutions are not the only ones who can have a liquidity problem. When many financial institutions experience a simultaneous shortage of liquidity and draw down their self-financed reserves, seek additional short-term debt from credit markets, or try to sell-off assets to generate cash, a liquidity crisis can occur. Interest rates rise, minimum required reserve limits become a binding constraint, and assets fall in value or become unsaleable as everyone tries to sell at once. Swift rate increases and a liquidity crisis at a handful of banks, including several major failures and shutdowns late in the first quarter, have placed a far greater premium on deposits at US banks. The search for deposits will cause already increasing deposit costs to accelerate at a quicker pace in the first half.

The steps that are required to be taken will depend on the jurisdiction of the relevant guarantor and the governing law of the existing security documents. Depending on the extent of the existing guarantee and security package, including the number of jurisdictions involved, these steps may be time consuming and costly. Liquidity providers may agree for some of these steps to be carried out on a post-funding basis so as not to delay the provision of the urgently required liquidity.

Binance steps in with deal to rescue arch-rival after surge in withdrawals.

The pressure was even greater in the first quarter as deposit outflows accelerated due to the liquidity crunch at a few institutions. The shifts in deposits will cause funding costs to rise significantly, particularly in the first half, as the fallout from the second- and third-largest bank failures in US history has sparked concerns over the entire banking industry’s funding. The increased funding costs will serve as a headwind to banks’ net interest margins.

Liquidity problems can occur at a single institution, but a true liquidity crisis usually refers to a simultaneous lack of liquidity across many institutions or an entire financial system. Hence, when the economy faces difficulty – stock markets and asset prices drop sharply. This is because everyone is selling them to “liquidate” their holdings and convert them to cash. For UBS, staunching the outflow of liquidity crunch meaning deposits and AUM is the most pressing matter; Figure 4 illustrates the erosion of Credit Suisse’s wealth management franchise in late 2022. Like the troubled American banks, Credit Suisse was in part a story of customer asset outflows, though in this case AUM in addition to deposits. If not, then the real winner in this merger (beyond the stability of the financial system) may prove to be Julius Baer.

Markets

This produces a cash flow problem, where the anticipated revenue from the business’ various projects does not arrive soon enough or in sufficient volume to make payments toward the corresponding financing.

According to the Bangladesh Bank’s data, the government has borrowed Tk65,605 crore from the Bangladesh Bank in the last six months, of which Tk33,355 crore has been used to repay loans to commercial banks. However, bankers say that trying to handle the situation in this way can make the situation worse. Interest rates in loans must be based on market demand and supply, they add.

Is the Proposed Funding ‘Indebtedness’ for the Purposes of the Incurrence Covenants?

It’s worth reaching out to all lenders and suppliers, explaining your situation, and seeing what kind of flexibility they can offer. Some will be willing to postpone some or all your payments, especially if you have maintained a good relationship with them in the past. I hope that the continued study of crisis events will yield further lessons for central bankers looking to shield economies from the effects of shocks to the financial system. Even with these very divergent origins, the GFC and pandemic crisis impacted financial markets in some similar ways. It led to rise in the Credit-to-Deposit ratio to 90.87%, which is above the upper limit (90%) as directed by the Nepal Rastra Bank.

Since there are multiple buyers and sellers, a market with high liquidity is ideal because it leads to better prices for all participants. Therefore, in a booming market with lots of trading activity, an equilibrium market price that is acceptable to everyone typically develops. In other words, a crypto market is liquid if someone is eager to buy when you look to see; and if you decide to buy, someone wishes to sell. It implies that you can purchase the desired quantity of the virtual asset, profit from a trading opportunity, or, in the worst-case scenario, minimize your losses should the asset’s value decline below your costs—all without significantly shifting the market. At its Investor Day in November, First Republic highlighted its progress in wealth management. Over the past decade, even as the bank itself has grown substantially, the contribution of wealth management has risen from 7% to 15% of total revenues.