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Being a shareholder in a bank and having a deposit are two different things, but in the end the same thing decides for both – Víkendář

NYU Stern Professor of Economics Lawrence J. White spoke on Yahoo Finance about UBS’ acquisition of CSFB. According to him, Credit Suisse has been mismanaged over the past 15 years. If something like this happened in general compIt’s a problem for its shareholders, and sometimes even for its employees. However, in the case of banks, the consequences may be broader, as they are part of the entire banking system. Then the international banks influence the world system.

Yahoo Finance conducted an interview with the professor entitled “Banks are very fragile.” However, White spoke of vulnerability if savers with deposits with the bank and other creditors “start to get nervous.” Thus, the “financial structure of such a bank” collapses. A recent example is the Silicon Valley bank, which lost more than $40 billion in deposits due to the aforementioned tension.

In the case of the Silicon Valley bank, there was a so-called flow into the bank, when there is an outflow of deposits, which raises the anxiety even more and the whole spiral turns more and more. In addition, the professor once again mentioned that banks are concerned with the stability of the entire financial system and are therefore different from ordinary banks comp. This is doubly true of banks such as Credit Suisse, which have $500 billion in assets under management and are the second largest in Switzerland. If its creditors are “running”, the Swiss government “must do something”.

According to the professor, banks are a complex business and none of the savers with deposits they have can properly estimate their financial strength. This can contribute to infection, as problems in one bank raise concerns about the safety of deposits in others. The problem may not be in the direct relations between the banks, but the tensions may only spread due to the described mechanism.

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White described the need for an adequate amount of equity capital. This represents the difference between the value of assets and the value of liabilities. The higher the value it reaches, the more flexible the bank should be. To this, the expert added that if he was a shareholder in the bank, he would be interested in the amount of capital so as not to face too much risk. If he has a deposit in the bank, he would rather be interested in whether and to what extent his deposit is insured. Including if there are any limits on the amount insured and how quickly he can get his money back in the event of a problem.

Thus, being a shareholder is different than having a deposit with the specified bank. “At the end of the day, both groups are concerned with the financial strength and resilience of a bank or other financial institution,” the professor concluded.

Source: Yahoo Finance