Frankfurt According to the observations of the Federal Association of German Banks (BdB), the digitization of the banking business accelerates the pace of customer deposit outflows in crisis situations. “The speed of customer reactions is different than in 2008,” said BdB President and Deutsche Bank boss Christian Sewing on Monday. The example of the Silicon Valley Bank (SVB) showed that “one, two, three tweets” could trigger an enormous amount. This is different than during the financial crisis.
The risk of bank runs is not higher, but the speed of customer behavior has changed. “As a bank, you have to take that into account,” emphasized Sewing. According to his observation, banks would have done that too. Sewing pointed out that he believes it is important for banks to diversify their deposits.
The Silicon Valley Bank mainly had customers among start-ups and venture capital financiers. These deposits were almost entirely exempt from US deposit protection, which is normally capped at $250,000. When SVB got into trouble because many customers needed their deposits because of the problems in the technology industry, word spread like wildfire and triggered a flight of customers. This led to the bankruptcy of the SVB.
From Sewing’s point of view, this development shows how important it is for banks to diversify their deposits broadly. “It makes a huge difference whether you’re dealing with concentrated large deposits or an institution with millions of customers,” he said. The customer base of the SVB was very homogeneous.
The extent to which deposits are protected by deposit insurance also plays an important role. Most European banks have a “much more diversified deposit base” so they are less dependent on developments in specific industries or the decisions of some customers.
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Since the bankruptcy of US regional institutes such as SVB or Signature, there have been discussions in the US and Great Britain about expanding deposit insurance for customer deposits. Because the SVB bankruptcy had led to customers withdrawing their deposits from other American regional institutes.
Scientists from the Frankfurt Leibniz Institute SAFE, on the other hand, had called for full protection for deposits from companies and private customers that can be canceled at short notice. From the point of view of the research team, this is necessary to prevent bank runs.
BdB President Sewing has a different opinion. “I don’t believe in insuring everything,” he said. The private banking association has just trimmed its additional deposit protection, which goes beyond the legally prescribed 100,000 euros per customer.
Criticism of the reform of the EU resolution rules
Since January, the deposits of professional customers such as insurance companies, investment companies or public bodies have no longer been protected at all. There are upper limits for private customers, which will drop from five million euros to one million euros by 2030. For companies or charitable organizations, the protected deposit volume drops from EUR 50 million to EUR 10 million during this period.
This reform is primarily a concern of the BdB’s large banks, which pay the highest contributions to the deposit insurance fund, but could not be saved even with its funds if they got into trouble. Smaller private banks fear that the reform could put them at greater risk because it means less protection for customer deposits in the future and customers could therefore withdraw their deposits more quickly in turbulent market phases.
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Nevertheless, Sewing is sticking to the reform of deposit insurance. In his view, Germany has a very dense network of deposit insurance. Long transitional periods were agreed for the reform of the additional BdB deposit protection scheme, which would give each bank enough time to adapt its refinancing to the new circumstances. The most important thing is that a bank has a functioning business model. The institutes should “not only depend on deposit protection”.
However, Sewing criticized the changes planned by the EU Commission in the regulations for bank resolutions and deposit insurance. The Brussels authority wants to make resolution the standard tool in banks’ crisis management. “That would be at the expense of our well-functioning national deposit guarantee systems, which have proven their effectiveness many times over the past few years and rightly enjoy a high level of trust,” said Sewing.
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