On Monday, April 10, the Wall Street Journal reported that before its collapse, Silicon Valley Bank's "reported cash was only around 8% of total deposits, heightening the risk it would need to sell long-term assets if significant numbers of its depositors left." 

All banks, especially commercial, must always pay close attention to liquidity.  Commercial banks offer demand deposits comprising monies that can be withdrawn at will.  Current cash for a bank needs to have a healthy ratio when compared with demand deposits.  Is anyone comfortable with demand deposits running 12 times the amount of cash on hand, as reported by the WSJ?  Is this not a bank waiting for a run?

The Federal Reserve suggests many methods for banks and depositors to judge liquidity.  A common method is the Liquidity Coverage Ratio (LCR).  This measures the ability of a bank to meet short-term obligations over a 30-day period without needing to access any outside cash.  The problem is that a "run on the bank" is not a "walk on the bank."  A run can bring down a bank in far less than 30 days.

Another common method is the Leverage Ratio (L.R.).  It compares the bank's Tier 1 capital (common stock, disclosed reserves, and certain other assets) with its total risk-weighted assets (a compilation of assets the bank holds that are weighted by credit risk).  Under the Basel III accord, the value of a bank's Tier 1 capital must be greater than 6% of its risk-weighted assets.

I wonder who assigns the risk of each asset.  Can reasonable persons agree?  Things are beginning to get complicated.  This method may be useful for the Fed to rate a bank's strength, but it is certainly not useful for depositors to judge the safety of their deposits.

It gets worse.  A third ratio is "The Common Equity Tier 1 Capital / Risk-Weighted Assets (CET1)."  It uses subjective input, just as L.R. does. 

There are many additional ratios and tests that banks are subjected to.  Does anyone understand how bank stress tests are really performed and what they reveal?  Since they also cover 30-day periods, how can they foretell a run? 

A simple test for bank solvency, as related to runs, is to develop the ratio of cash on hand to demand deposits.  Below are snapshots for the SVB Financial Group as per their Annual Report for year ending 12/31/2022. 

This reveals that SVB's Cash to Demand deposits for 12/31/2022 equaled 13.8 billion / 80.8 billion or 17%.  As a depositor, this seems a bit low.  There may not be an exact percentage that raises the red flag, but it seems reasonable that anything under 50% should be noticed and followed over time.

With all the rules and regulations that currently exist, it seems odd that the government, apparently, doesn't follow bank trends on this simple ratio.  As the WSJ pointed out, SVB's ratio went from 17% to 8% in just two months.  Any wonder they didn't go under earlier?

Dann E. Kroeger is a patriot and entrepreneur.

Image: Nick Youngson, CC BY-SA 3.0, Alpha Stock Images.  Original image: Picserver.org.