Over the past weeks, some corners of the financial system have started to show cracks due to pressure from the fastest monetary policy tightening on record.
2023 opened with a stream of crypto-led bankruptcies that ultimately drove the demise of Signature Bank of New York (SBNY). Then came the collapse of the Silicon Valley Bank (SVB), a lender to startups and their venture capital backers, in what was labelled a “Lehman moment for technology”. Tensions spilled over to Europe and claimed Credit Suisse (CS) – born in 1856 and killed, according to its Chairman, by a social media storm last week.
In a world in which depositors can handle both money and information digitally, bank rushes have replaced bank runs. This creates new challenges for banking authorities.
How should policymakers handle banks that face a lightning-speed deterioration in liquidity without any capital shortfall? The rules underpinning banks’ liquidity requirements need a revamp, as they were devised under the assumption that deposits would move much more slowly than what was seen in the recent bank failures.
Conservative assumptions in liquidity requirements would afford authorities more time to deal with rapid banking crises. However, the only real way to mitigate this kind of financial stability risk is to strengthen confidence in the system.
To avoid banking failure within the EU, policymakers should dust off the long-dormant EU Deposit Insurance Scheme file. They must agree to complete the EU Banking Union, moving beyond the non-committal statement included in last week’s Euro summit conclusions on the matter.