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Why are mergers the go-to solution for rescuing banks? Why do they think that, rather than "arrest[ing the] collapse in confidence in Credit Suisse," a merge wo
by Uvix 4y ago
Why are mergers the go-to solution for rescuing banks? Why do they think that, rather than "arrest[ing the] collapse in confidence in Credit Suisse," a merge won't just cause a similar collapse in confidence for UBS too?
- simple-thoughts 4y agoMy non expert understanding is that it allows the bank equity to be haircut assuming there is enough equity to cover the losses. If there isn’t enough equity, then the merger wouldn’t go through.
- unyttigfjelltol 4y agoWhen debt is still collectible at maturity, what you really need is a bigger balance sheet to reach maturity....
- notatoad 4y agoall banks have an interest in reassuring people that putting your money in a bank is a good idea. letting a bank fail does the opposite of that.
- jldugger 4y agoProbably worth going through all the options for distressed banks: -1. Sell distressed assets (Treasuies?) into the market to meet withdrawals. This is bad, in the sense that it converts an unrealized loss into a realized one, and if allowed to continue will shortchange a depositor. 0. Sell the company, and use the proceeds to pay off bond holders, and maybe shareholders if lucky. Merger is basically a fast track version of this. 1. Raising more equity. Dilutes existing shareholders but sometimes something is better than nothing. Usually pretty slow, but I bet you could get a direct listing done quick. Arguably announcing a new raise is what caused the SVB run. 2. Issuing corporate debt / bonds. You'd have to be a special kind of person to buy bonds from a failing bank: limited upside, tons of risk. 3. Attracting / retaining deposits. You can raise rates to retain people, but its very much the same problem as bonds, just slightly less risk of being zeroed out. You can hook up to deposit brokers, but there are rules around them because one decision maker behind millions of deposits is destablizing. Seems like a solution you can only apply before the problem is severe. 4. Sell pieces of the bank / accounts. Retail deposits are valuable in the sense that they are a very cheap source of money for banks. But you kinda have to sell _all_ the accounts, or theres a buyer-seller information asymmetry that Akerlof wrote about. Even if you solve the lemon market dilemma, you are selling a cheap funding source, and need to borrow elsewhere to replace the funding source. AFAICT, what happens is deposit insurers, bond holders and the potential acquirers sit in a locked room look at financial statements and try to make a guess at how much money the insurers need to pay to get some acquirer to agree to buy the whole bank, with as little disruption to depositors as possible.