|Graffiti questioning the future of Credit Suisse appeared outside the bank's headquarters in Zurich in the days prior to its takeover by UBS.
Source: Arnd Wiegmann/Getty Images News via Getty Images Europe.
The collapse of Silicon Valley Bank and the emergency takeover of Credit Suisse Group AG by UBS Group AG will force European banking authorities to develop more effective measures to prevent and stop digitally driven bank runs.
Greater scrutiny of lenders' deposits and more thorough analysis of the risks posed by the interconnectedness of the global banking system are also likely to be among the areas addressed as regulators and supervisors respond to the dangers highlighted by the recent turmoil in the sector.
US regulators were forced to shut down Silicon Valley Bank after its surprise decision to sell much of its bond portfolio at a loss led to a significant run on its deposits. The collapse of SVB and two other US banks in a matter of days stoked fears among investors about the stability of other banks, particularly long-troubled Credit Suisse, as its share price plummeted in the weeks prior to its takeover.
"The tools that the regulators and supervisors had before, they no longer work for bank runs," said Pablo Manzano, vice president of financial institutions at credit rating agency DBRS Morningstar. "This is a lesson that the European authorities can learn from and it's a good opportunity to make the system stronger."
Much of European regulators' focus in the aftermath of the turmoil is expected to settle on measures preventing the type of digital runs on banks' deposits that SVB experienced. The speed of the run, which led to the second-largest banking failure in US history, was unprecedented, as depositors withdrew more than $40 billion the day before the bank collapsed. The largest US bank failure, Washington Mutual in 2008, had $16.7 billion withdrawn over a nine-day stretch.
"The SVB case surely will speed up a process in which regulators will have to ask banks to take remedial actions when bank runs occur digitally," said Amedeo Pugliese, professor of accounting at Italy's University of Padova and Barcelona's Universitat Pompeu Fabra.
One potential solution to a digital bank run is disabling a bank's website for a limited period to slow the pace of withdrawals, equivalent to the temporary shuttering of a branch during traditional bank runs, Pugliese said.
"This is not ideal," Pugliese said. "But digital bank runs are a lot more powerful, and it's difficult to control them because you can't shut down depositors' internet connection."
Prevention before cure
Authorities could look at ways to discourage depositors from joining bank runs before such drastic measures are required. European regulators should consider increasing the threshold for insured deposits, which would reduce the likelihood of withdrawals below that threshold if concerns rise around a bank's stability, said Sam Theodore, senior banking consultant at Scope Insights.
Deposits up to €100,000 are insured in the eurozone, while the UK insures deposits up to £85,000 and Switzerland up to CHF100,000. In the US, deposits of up to $250,000 are protected.
The US Treasury Department reportedly reviewed ways to expand federal insurance coverage to all deposits on a temporary basis, a move that European regulators could also consider, Manzano said. However, US Treasury Secretary Janet Yellen later said her agency was not considering such a move.
The European Banking Authority is discussing what lessons are to be learned from the recent turmoil in the sector, according to a spokesperson. The process is expected to "take some time given that both regulation and supervision aspects are being discussed," they added.
European authorities should focus on "effective supervision" rather than "restarting the debate on regulatory reforms," Andrea Enria, chair of the supervisory board of the European Central Bank, said at a conference March 28.
Increasing deposit insurance would present some complications for European regulators. Any increase would heighten moral hazard or encourage banks to take greater risk with deposits, Pugliese said.
Banks would also have to bear the burden of any increase, as deposit guarantee schemes introduced after the global financial crisis are pre-funded by the lenders.
"It would mean lower profitability again for [European] banks," said Marco Troiano, managing director of financial institutions at Scope Ratings, in a March 24 webinar.
Some even question the effectiveness of insuring deposits above the current thresholds in Europe, given that most deposits are below this threshold.
"If you look at the median deposits for households or businesses, it is way below the actual threshold," Pugliese said. "So there is no need."
Approaches to protecting depositors in some European jurisdictions could see more widespread adoption across the continent in response to the recent turmoil. Italy and Portugal give priority to depositors over almost all other liabilities, a measure that could reassure depositors in the event of solvency concerns, Manzano said.
"If you think that these rules are going to be respected by everyone — it's a big if — this is one possibility to partially avoid bank runs," Manzano said.
Regulators are at least likely to demand greater disclosure from banks on the composition and profile of their deposits to identify problems much earlier than currently possible.
"Banks' deposit disclosure is insufficient, especially in Europe," said Scope Insights' Theodore. "Supervisors need to focus more on the liability side of banks, especially on deposits."
Regulators and analysts have "good visibility" on a banks' breakdown of retail versus corporate deposits and sight versus term deposits, Troiano said. Greater clarity on the ratio of insured to uninsured deposits and the "relative stickiness of a deposit base" would produce more reliable assessments of banks' funding and liquidity, he added.
The European Banking Authority should consider a greater role for deposit volatility in its stress-test scenarios, Theodore said. The regulator conducts annual stress tests that measure eurozone banks' ability to withstand sudden macroeconomic shocks. It also recently launched stress tests that model the impact of climate change on banks' balance sheets.
"The market should see the results [of how the sector performs when exposed to deposit volatility] — not bank by bank, which is going to be more sensitive, but at least on aggregate with outliers," Theodore said.
'Huge policy mistake'
European regulators must also reassess the risks posed by relatively small banks and the increasing interconnectedness of the global banking system, as seen in Credit Suisse's hasty demise following SVB's collapse, Theodore said.
"A butterfly in Santa Clara, California, flapped its wings and caused an earthquake in Zurich," Theodore said. "If you limit yourself to [monitoring globally systemically important banks] and say everybody else in the market is not relevant, you're making a huge policy mistake."