Sam Theodore believes the proposals are a welcome step but says they don’t address the challenge of avoiding or minimising bank runs because they are pegged to the scenario of a bank falling into a failing state reflected by worsening prudential metrics. The SVB/Credit Suisse cases showed that bank runs can and do occur in institutions with capital, leverage and liquidity safely in the regulatory ballpark.

In their current form, EU regulations, including the CMDI reform proposal, do not address the risk of bank runs. They only focus on protecting depositors in the case of a stressed bank at the threshold of resolution or liquidation. But the alternative may not be solely between using a deposit guarantee scheme or taxpayer funds, as the CMDI reform proposal suggests. Forced M&A is a plausible and potentially more effective alternative.

Also, there appears to be no policy appetite in the euro area to raise the deposit insurance ceiling from EUR 100k. Raising the ceiling to EUR 250k-300k would substantially lower the risk of a bank run as it would provide peace of mind to larger depositors, typically among the most flight-prone categories.

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