European lessons from Silicon Valley Bank resolution: A plea for a comprehensive demand deposit protection scheme (CDDPS)

Florian Heider, Jan Pieter Krahnen, Loriana Pelizzon, Jonas Schlegel and Tobias Tröger

No 98, SAFE Policy Letters from Leibniz Institute for Financial Research SAFE

Abstract: The SVB case is a wake-up call for Europe's regulators as it demonstrates the destructive power of a bank-run: it undermines the role of loss absorbing capital, elbowing governments to bailout affected banks. Many types of bank management weaknesses, like excessive duration risk, may raise concerns of bank losses - but to serve as a run-trigger, there needs to be a large enough group of bank depositors that fails to be fully covered by a deposit insurance scheme. Latent run-risk is the root cause of inefficient liquidations, and we argue that a run on SVB assets could have been avoided altogether by a more thoughtful deposit insurance scheme, sharply distinguishing between loss absorbing capital (equity plus bail-in debt) and other liabilities which are deemed not to be bail-inable, namely demand deposits. These evidence-based insights have direct implications for Europe's banking regulation, suggesting a minimum and a maximum for a banks' loss absorption capacity.

Keywords: European; Deposit; protection; scheme (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cba
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Citations: View citations in EconPapers (2)

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