The rapid increase of rates globally has caught most banks, globally, unprepared. None of them, saw the hikes coming, and particularly the speed, has been lethal for them. Although there have been stress test perfomed on them, the adverse scenarios considered were far from the severity of the reality the have encountered. Now the IMF has made a study of 900 banks globally and has found out that deposits runoff rates of 10% may imply that banks need to tap the Held To Maturity bucket for liquidity. Deposits are running off banks because clients are looking for higher rates from the short term bills that banks cannot match because their assets (bonds and loans) are for the most part, underwater. And the issue is that if that 10% is breached, and they need to sell those HTM bonds (which are valued at par), they will need to mark them to market, and some of them might be 10-15% or even 20% under par, worsening the situation. That’s why lending standards are tight, and that’s why economic activity may slow down into recession.
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