A guarantee for all bank deposits
Following the bank run on the U.S. Silicon Valley Bank and the UBS Group’s takeover of the major Swiss bank Credit Suisse, concerns about a new banking crisis in Europe grew. Researchers at the Leibniz Institute for Financial Research SAFE have published a Policy Letter discussing possible countermeasures, such as introducing deposit insurance for all demand deposits, including those above 100,000 euros.
On 3 April 2023, the authors Florian Heider, Jan Pieter Krahnen, Loriana Pelizzon, and Tobias Tröger were joined by Elke König, former President of the German Federal Financial Supervisory Authority (BaFin), and Lorenzo Bini Smaghi, Chairman of the major French bank Société Générale and former Executive Board member of the European Central Bank, in a SAFE-CEPR Policy Webinar to discuss the consequences of the end of Silicon Valley Bank and Credit Suisse. The debate at the event clarified that while regulation has become more efficient since the 2009 financial crisis, there are still unresolved questions. In their position paper, the SAFE researchers, therefore, call for an extension of existing measures, such as safeguarding all bank deposits, including those above 100,000 euros, so that bank runs as a risk factor can at best be eliminated, at least minimized.
In a short presentation of SAFE Policy Letter No. 98, SAFE Founding Director Jan Krahnen explained that both banks used an unprofitable business model and accepted the risk of a bank run. Consequently, this would create enormous time pressure for the authorities to prevent spillover effects throughout the market.
According to Lorenzo Bini Smaghi, a bank run is an important signal for the end of a bank: “Supervisors can’t say to a bank: ‘You are insolvent.’ If the insurance on all deposits prevented bank runs, the undoubted signal that a bank is really done would be missing.” He also asked which indicators in the system proposed by the researchers would then point to the insolvency of banks. Jan Krahnen replied that loss-absorbing capital enables the market to work. In this context, banks should pay the price of deposit insurance that the market demands at that time.
Elke König agreed with Bini Smaghi but also said, referring to Silicon Valley Bank and Credit Suisse, “It’s obvious that there were failures in bank management.” The markets subsequently expected an extension to the entire European banking market. However, this did not happen, as the tighter European supervisory framework fulfilled its task, König said. She added that while household deposits need to be better protected, it is at least doubtful that venture capital also needs to be covered: “If we insured all deposits without distinction, we would have a serious free-rider problem.” Tobias Tröger, Director of the SAFE Research Cluster Law and Finance, countered that regulators need to look more closely at transaction accounts and large deposits.
Loriana Pelizzon, Director of SAFE’s Research Department Financial Markets, added that large corporations also need to be closely watched regarding deposit insurance. “They would be the first ones in the position to trigger a bank run. If they don’t go for it, the companies will be considered ‘too big to fail’.”
At the end of the discussion, Florian Heider drew attention to the size of banks. He argued that there are also larger banks in some smaller European countries. For these to fit together in terms of their asset size, banking supervision would have to become more European within the framework of the Capital Markets Union.