It is of essential importance in operation of all banks to explore the time duration for the transaction realization and the time period during which the bank is at risk in relation with non-realization of a contract for signed transactions. Each bank has to specify two deadlines: deadline until which the bank may unilaterally make annulment of payment orders and deadline in which it is established if the settlement was realized as per all contractual terms or the settlement was not executed in that manner.
Deadline in which the bank may annul its order may be defined as ultimate time in all regular and ordinary situations; the bank may one-sidedly change the payment order or send the instructions with delay. For example, if the bank uses correspondent bank in order to meet its part of the agreement, this deadline is the time until when a correction order may be sent to its correspondent bank, before the correspondent bank may initiate its realization.
Second deadline or the time which is established if the settlement was completed as agreed, is named as the time which starts at the moment agreed for settlement with the contracting party, and ends at the moment when the bank is safe that the settlement was realized within the anticipated time and the projected amount or some omission was made in the settlement. For example, if the bank uses correspondent bank for receipt of payment orders, this time is the time when the bank checks up the information it gets from its correspondent bank and verifies if everything is in order.
With the traditional manner of work, settlement with it brings high operational, liquidity risk, which is identical with the value of the agreed transactions. Each party is exposed to these risks, because it may fear at any moment that the counter party shall meet its liabilities.
Following the long period of unusually low interest rates, there was a concern at the market that when the central banks shall increase the interest rates unexpectedly, it might result in certain negative outcome. Developments at the global financial markets in the past two weeks (failing of several banks in USA and saving of Credit Suisse in Europe), have served as sharp reminder that still there is a need for compromise between tightening of the monetary policies and maintenance of financial stability.
First, the American bank, Silicon Valley declared a sale plan on the 8th of March for its shares in amount of 2,25 billion USD, at the same time declaring significant losses of its investment portfolio. As a follow up, the next day already, the shares dropped by 60%, whereby the Federal Deposit Insurance Corporation (hereinafter the FDIC) reached a decision that this bank to terminate its operation.
Although Silicon Valey was not considered as a systemic important bank, still its illiquidity has forced the Federal Reserves to act in order to prevent further “systemic infection”. Rapid intervention by FED, which managed to provide whole deposit guarantee, as well as to provide additional liquidity for other endangered banks (by valuating their collateral, treasury bills and bonds of USA per nominal price), indicates to considerable concern in relation with the “financial infection” which might possibly follow up.
Similar faith was experienced by another US bank, Signature Bank on the 12th of March. Namely, this is the 3rd largest bank in the USA history which declared bankruptcy, mainly as a result of rapid withdrawal of around 20% of entire deposit base. Though this bank has not had high exposure to the crypto market, still the regulator lost confidence in the bank management and it ended up under FDIC monitoring.