Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271005 
Year of Publication: 
2023
Series/Report no.: 
SAFE Policy Letter No. 98
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
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.
Subjects: 
European Deposit protection scheme
Persistent Identifier of the first edition: 
Document Type: 
Research Report

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