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Is the current crisis management framework enough for the age of digital bank runs?

Publishing date
03 April 2023
Authors
Silvia Merler
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is the current crisis management framework enough for the age of digital bank runs?

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.  

The Why Axis is a weekly newsletter distributed by Bruegel, bringing you the latest research on European economic policy. 

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About the authors

  • Silvia Merler

    Silvia Merler, an Italian citizen, is the Head of ESG and Policy Research at Algebris Investments.

    She joined Bruegel as Affiliate fellow at Bruegel in August 2013. Her main research interests include international macro and financial economics, central banking and EU institutions and policy making.

    Before joining Bruegel, she worked as Economic Analyst in DG Economic and Financial Affairs of the European Commission (ECFIN). There she focused on macro-financial stability as well as financial assistance and stability mechanisms, in particular on the European Stability Mechanism (ESM), providing supportive analysis for the policy negotiations.

     

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