Expert warns €100,000 deposit insurance too low in current banking turmoil

Lucrezia Reichlin, professor of economics at the London Business School, predicts "other banking crises to happen" if interest rates continue to rise.

The International Monetary Fund headquarters in Washington.

A leading banking expert has told the International Monetary Fund that the €100,000 guarantee on bank deposits in the European Union is set at too low a level, given the current banking turmoil.

In an interview for an IMF blog, Lucrezia Reichlin, professor of economics at the London Business School, also warned there were issues with the powers of global regulators to deal with the collapse of Silicon Valley Bank and other lenders in the US, and to the forced sale of troubled Credit Suisse to UBS in Europe.

"Another concern is that deposit insurance is low in the EU, at only €100,000, and there is no systemic risk exemption, unlike in the US, where depositors can expect to be protected in cases where a bank's collapse would pose a risk to the entire financial system," Prof Reichlin said in the interview. 

This, combined with the fact that the banking union doesn't involve common deposit insurance at the EU level, makes the system fragile."

Prof Reichlin said she expected "other banking crises to happen" if global central banks continued to hike interest rates.

"The US and the Swiss crises are different," she said.

"The first involves midsize banks with assets dominated by safe government bonds, whose mark-to-market value declined as interest rates increased, and deposits concentrated on a particular sector. The second involves a very large institution with long-standing idiosyncratic problems more broadly defined.

"However, both crises show regulatory failures and poor risk management, and they were both triggered by the increase in interest rates related to the synchronised and harshest monetary policy tightness we have experienced since World War Two. 

"In these circumstances, financial fragility must be expected in those parts of the system which are badly managed, poorly regulated, and more exposed to tight credit conditions."