What drains liquidity · RiskAtoms Academy

By the end you will be able to

1Name the ways liquidity drains from a bank: deposit runs, funding that is not rolled over, drawdowns of committed facilities and collateral calls.
2Tell contractual, behavioural and contingent outflows apart, on and off the balance sheet, and size each on the book.
3Explain what made the Northern Rock (2007) and Silicon Valley Bank (2023) runs different in source and speed.
4Rank the drains in the book's stress scenarios and say which ones decide the outcome.

Why it matters

In 2008 Washington Mutual lost $19 billion of deposits over 16 days. In March 2023 Silicon Valley Bank lost over $40 billion in one day, and expected over $100 billion more the next: together roughly 85% of its deposit base (Federal Reserve review). A liquidity plan written for the first kind of run would not have seen the second coming. Knowing where cash can leave, and how fast, is the first job of liquidity risk.

Core explanation

Four ways out

Illustrative dataRiskAtoms Bank plc's liquidity book

A made-up UK bank's £67bn balance sheet on one made-up reporting date, in pounds, seen through its cash flows: every line's contractual maturity in ten buckets from overnight to over five years, its undrawn commitments and collateral triggers, and a 90-day stress test. The figures are round illustrative values, not any bank's data. The same book runs through every lesson in Module 3.5, so the figures agree.

The figures below are the book's three stress scenarios over their first 30 days. Principal only; facility drawdowns and market collateral calls are spread evenly over the month.

L3.5.02: How banks fund themselves laid out who funds RiskAtoms Bank. Every one of those sources is a door cash can leave by, and the off-balance-sheet promises add more. They fall into four groups.

1. Deposit runs

Demand deposits can leave at any time; in a run they do. A stress test expresses this as a run-off rate per category. In the book's name-specific scenario 8% of the £22.0bn of insured current accounts and 25% of the £10.0bn of instant-access savings go in 30 days, and runs are front-loaded: 58% of the month's run-off happens in the first five days. Behaviour, not contracts, decides this drain, and insurance and the type of depositor drive behaviour (uninsured balances leave first).

2. Funding that is not rolled over

Term funding cannot be withdrawn early, but it matures. Every maturity is a decision for the lender: renew or take the cash. That is rollover risk. On the book, £3.1bn of wholesale funding falls due within 30 days (£2.4bn of deposits from banks, £0.7bn of CP and CDs), and about £4.2bn within 90. In the name-specific and combined scenarios the rollover rate of all of it is zero: professional lenders do not lend unsecured to a bank that has just been downgraded.

3. Committed facilities

A committed facility is the mirror image of a deposit: the customer can take cash at will. Customers draw exactly when markets are hard, which is when the bank is short too. In March 2020, as the pandemic hit, US companies drew on their lines on a scale never seen before: commercial and industrial loans rose by $482 billion between 11 March and 1 April (Li, Strahan and Zhang). RiskAtoms Bank has £11.8bn of undrawn commitments, £8.0bn of them credit lines to companies.

4. Collateral calls

Under a CSA (L3.4.05: Collateral and the CSA), collateral thresholds can fall with the bank's rating, and some contracts have downgrade triggers. The book would post £400m more after a three-notch downgrade. Market moves call collateral too: the book's historical look-back, its largest 30-day net collateral outflow in two years, is £300m.

Facilities and collateral calls are contingent and off the balance sheet, so they never show in the accounts' liabilities. The book's list:

Off-balance-sheet items, £m, with the share the LCR assumes is drawn or paid out in a 30-day stress.
Item	Amount	LCR rate	30-day outflow
Undrawn committed credit facilities to companies	£8,000m	10%	£800m
Undrawn liquidity facilities to companies (commercial paper back-up lines)	£500m	30%	£150m
Undrawn committed facilities to other banks	£300m	40%	£120m
Undrawn retail limits (cards, overdrafts, mortgage offers)	£3,000m	5%	£150m
Extra derivative collateral after a three-notch downgrade	£400m	100%	£400m
Largest 30-day net collateral outflow in the past two years	£300m	100%	£300m
Total	£12,500m		£1,920m

The LCR column is the regulator's standard assumption (£1,920m in all); each scenario sets its own. One more drain hides on the asset side: a bank that refuses to renew any loan in a stress protects its cash and destroys its business, so the book assumes it keeps renewing 50% of maturing customer loans, a franchise outflow.

Sort itOn or off the balance sheet?

Savers moving their instant-access savings to a rival offering a better rate.
A retailer drawing £300m on its committed revolving credit facility.
A money market fund declining to buy the bank's new CDs when the old ones mature.
Extra collateral due to swap counterparties after a rating downgrade.
Home buyers completing on mortgage offers the bank made last month.
A fixed-term saver breaking a deposit early and paying the penalty.

Two runs, sixteen years apart

TimelineNorthern Rock, 2007

1 / 5

1998–2007

Growth on wholesale money

Retail deposits fell from 60% of Northern Rock's liabilities in 1998 to 23% in June 2007. Wholesale funding was £26.7bn, and securitised notes much more (Shin, 2009).

TimelineSilicon Valley Bank, 2023

1 / 4

2019–2022

Deposits pour in

The bank tripled in size between 2019 and 2021 as tech and venture-backed companies raised money and deposited it; by the end of 2022 venture-backed companies supplied more than half its deposits, and about 94% of its deposits were uninsured.

What the two runs share, and what they do not

Both failed because funding left, not because borrowers defaulted. Northern Rock's run started with wholesale lenders and reached the branches; SVB's was a deposit run, by uninsured companies, at internet speed. A stress test must cover both: rollover risk and deposit run-off, with the speed set by who the depositors are.

The formal version

A month's net outflow, source by source

Over a horizon of $T$ days, with demand balances $D_i$ and run-off rates $\rho_i$ , funding $M_j$ maturing within $T$ and rollover rates $\ell_j$ , undrawn facilities $U_k$ with drawdown rates $\delta_k$ , collateral calls $C$ , and inflows $I$ :

N(T) = \underbrace{\sum_i \rho_i D_i}_{\text{runs}} + \underbrace{\sum_j (1 - \ell_j)\, M_j}_{\text{not rolled}} + \underbrace{\sum_k \delta_k U_k}_{\text{drawn}} + \underbrace{C}_{\text{collateral}} - I

Each term has its own kind of uncertainty. $M_j$ is known from contracts, but $\ell_j$ is the lenders' choice. $D_i$ is known, but $\rho_i$ is behaviour. $\delta_k$ and $C$ depend on events. The combined scenario, at 30 days, in £m:

\begin{aligned} N(30) &= \underbrace{\text{£}7{,}200\text{m}}_{\text{runs}} + \underbrace{\text{£}6{,}610\text{m}}_{\text{not rolled}} + \underbrace{\text{£}2{,}120\text{m}}_{\text{drawn}} + \underbrace{\text{£}700\text{m}}_{\text{collateral}} - \underbrace{\text{£}3{,}975\text{m}}_{\text{inflows}} \\ &= \text{£}12{,}655\text{m} \end{aligned}

Try it

Pick one of the book's scenarios, then turn each drain up or down. Which dial moves the month's outcome most? Try switching off the downgrade, then try cutting the instant-access run-off by ten points.

Try itDrain the book for a month

Start from the book's scenario

Insured current accounts withdrawn10%

Instant-access savings withdrawn30%

Operational corporate deposits withdrawn40%

Maturing wholesale funding rolled over0%

Committed corporate credit lines drawn20%

Retail deposits£5,200m
Operational deposits£2,000m
Term and corporate not renewed£3,510m
Wholesale not rolled£3,100m
Facilities drawn£2,120m
Collateral calls£700m
Outflows in 30 days£16,630m

Net outflow (after inflows)£12,655m

Headroom at day 30£1,235m

Inflows that still arrive£3,975m

Buffer at this scenario's sale prices£13,890m

Off-balance-sheet share of outflows17.0%

Deposits' share of outflows43.3%

Illustrative, on the book. The dials set the 30-day share of each balance; the other assumptions (retail term and corporate rollover, loan renewals, sale prices) stay as in the chosen scenario. Other facilities move in proportion to the corporate credit lines. The daily path and the survival horizon come in L3.5.05.

Worked example

Where the combined month's cash goes

Rank the drains, then compare

Step 1 of 5

1

The outflows, largest first

Drain	£m	Share
Retail deposits withdrawn (current accounts and instant-access savings)	£5,200m	31.3%
Maturing retail term and corporate deposits not renewed	£3,510m	21.1%
Maturing wholesale funding not rolled (banks, CP and CDs)	£3,100m	18.6%
Committed facilities drawn	£2,120m	12.7%
Operational corporate deposits withdrawn	£2,000m	12.0%
Collateral called on a downgrade	£400m	2.4%
Collateral called on market moves	£300m	1.8%
Outflows	£16,630m	100.0%

Regulatory lens

The LCR's outflow side (Basel Framework, LCR40) is a catalogue of exactly these drains, each with a standard rate: retail and corporate deposits by stability, unsecured wholesale funding, secured funding by collateral, undrawn credit and liquidity facilities (from 5% for retail customers to 100% for liquidity lines to some financial institutions), 100% of the collateral a downgrade of up to three notches would trigger (LCR40.51), and the largest net 30-day collateral flow of the past 24 months for market moves. How the LCR adds them up is in L3.5.07: LCR and NSFR in practice and M4.5: Liquidity and IRRBB regulation. Banks also estimate their own behavioural run-off and drawdown rates from data, the subject of M6.7: Liquidity, ALM and behavioural models.

Spark Atoms

Spark AtomDrawn lines, and deposits that came back

In March 2020 US banks' loans to companies rose by $482 billion in three weeks, mostly drawn on existing credit lines: the largest increase in liquidity demand on banks ever observed. Yet deposits rose by almost $1 trillion in the same weeks, about $2 for every $1 of new lending, while the Federal Reserve expanded its balance sheet fast (Li, Strahan and Zhang, 2020). The drain hit the system; it did not hit every bank.

Spark AtomThe run nobody filmed

The pictures of Northern Rock are of queues outside branches. Hyun Song Shin points out that the run that mattered came earlier and out of sight: wholesale lenders quietly not renewing short-term funding. Retail depositors came later.

Key takeaways

Cash leaves a bank four ways: deposit runs, funding not rolled over, committed facilities drawn and collateral calls.
Some outflows are contractual (maturities), some behavioural (run-off, rollover choices), some contingent (drawdowns, downgrades, market moves).
Off-balance-sheet items are invisible in the liabilities: the book has £11.8bn of undrawn commitments and £400m of downgrade collateral.
Northern Rock's run began with wholesale lenders not rolling over; SVB's was a run of large uninsured deposits at internet speed.
In the combined scenario's first month, £16,630m leaves and £3,975m comes in; the £12,655m net outflow leaves £1,235m of headroom.

Reaction

Check what stuck

Question 1 · objective 1

In a stress, 10% of £22bn of insured current accounts and 30% of £10bn of instant-access savings are withdrawn within a month. How much leaves, in £bn?

£bn

Question 2 · objective 2

Companies have £8bn of undrawn committed credit lines with the bank. If 20% is drawn in a month, how much cash leaves, in £bn?

£bn

Question 3 · objective 2

Which of these is a contractual outflow, known in advance, rather than a behavioural or contingent one?

A£700m of CP falling due within 30 days that lenders choose not to renewBSavers moving instant-access money to another bankCA company drawing its committed credit lineDCollateral posted after a downgrade

Question 4 · objective 3

Why did Silicon Valley Bank's run move so much faster than Northern Rock's?

AMost of its deposits were large, uninsured balances held by a close-knit group of companies who could move them online in minutesBIts deposits were all fixed-termCIt had no access to the central bankDIts loans were riskier than Northern Rock's mortgages

Question 5 · objective 4

In the book's combined month, what share of the outflows comes from off-balance-sheet items (facilities and collateral calls), in %?

%

Glossary

Deposit run: Deposit run: depositors withdrawing money faster than usual because they fear the bank may not repay them.
Run-off rate: Run-off rate: the share of a balance assumed to be withdrawn over a stress horizon, such as 30 days.
Rollover risk: Rollover risk: the risk that maturing funding is not renewed, or only at a much higher price, so the bank must repay it in cash.
Rollover rate: Rollover rate: the share of maturing funding that lenders renew.
Committed facility: Committed facility: a credit or liquidity line the bank has promised to lend under, which the customer can draw at will within its terms.
Downgrade trigger: Downgrade trigger: a contract term that makes the bank post more collateral, or repay early, if its credit rating falls.
Contingent outflow: Contingent outflow: cash that leaves only if something happens, such as a drawdown, a downgrade or a market move.
Franchise outflow: Franchise outflow: lending the bank keeps doing in a stress, such as renewing customers' loans, to protect its business and reputation.
Uninsured deposit: Uninsured deposit: the part of a deposit above the deposit insurance limit.
Historical look-back: Historical look-back: the LCR's measure of collateral at risk from market moves, the largest net 30-day collateral flow in the past 24 months.

Deep Dives & Origins

Deep Dives

House of Commons Treasury Committee, The run on the Rock, Fifth Report of Session 2007–08, HC 56-I, January 2008. Introductory.
Board of Governors of the Federal Reserve System, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, April 2023. Intermediate.

Origins

H. S. Shin, “Reflections on Northern Rock: The Bank Run that Heralded the Global Financial Crisis”, Journal of Economic Perspectives, 23(1), 2009, pp. 101–119.
House of Commons Treasury Committee, The run on the Rock, HC 56-I, 2008, summary and paragraph 1.
National Audit Office, HM Treasury: The nationalisation of Northern Rock, HC 298, Session 2008–09, March 2009 (dates of the guarantee and nationalisation); BBC News, “Rush on Northern Rock continues”, September 2007 (the £1bn estimate).
Board of Governors of the Federal Reserve System, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, April 2023.
L. Li, P. E. Strahan and S. Zhang, “Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis”, NBER Working Paper 27256, 2020.
Basel Committee on Banking Supervision, Basel Framework, LCR40 Cash inflows and outflows (40.51) and LCR99 Application guidance, BIS.

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