The bankruptcy of US Silicon Valley Bank (SVB), caused by massive customer withdrawals, has reignited the specter of a “bank run” or banking panic. Banks and the government are far from powerless in the face of this risk, writes AFP.

What is a “bank run”?

A bank, despite the phenomenal amount of money it manages, does not have the liquidity to pay all its customers if they suddenly decide to withdraw all their money. Even if there is no reason to panic, just a little bit of fear is enough to make the machine go crazy.

This is similar to “precautionary shopping” that can lead to shortages of certain goods, such as gasoline during autumn protests at French refineries or toilet paper at the start of a pandemic.

In the case of SVB, the bank employed a risky strategy that worried customers and forced them to withdraw their assets. As the withdrawals became too large, SVB was forced to sell assets that had significantly lost their value, resulting in losses that were too large to cover.

Is a banking panic possible in Europe?

According to several specialists, this is unlikely in the sense that in Europe “these are not the same business models at all, with much more diversified divisions”, Thibaut Douare, manager of Tikehau Capital, explained to AFP.

In addition, “our liquidity standards are more restrictive than in the United States,” added Philip Wechter, director of economic research at Ostrum Asset Management.

For Julien-Pierre Nouin, director of economic research at Lazard Frères Gestion, the SVB case illustrates “the persistence of regulatory loopholes applicable to smaller US banks.”

After the 2008 financial crisis, major banks had to increase minimum capital levels to cover potential losses.

This requirement, known as the “solid capital ratio,” is the work of Switzerland’s Basel Committee, an international body made up of supervisors from several countries that develop common banking rules.

The European Banking Authority also conducts stress tests for the continent’s 50 largest banks, tests that are also carried out in the US.

“I really believe that Europeans have learned all the lessons of the 2008 financial crisis to strengthen the protection of the banking system and European banks, especially French banks,” French Economy Minister Bruno Le Maire said on Tuesday, adding that he had met with “all the heads of the French banks and with the governor of the Bank of France to review the situation with them.”

What tools to use in the event of a banking crisis?

Despite the tightening of the rules, panic can never be completely ruled out, so in recent days there have been reassuring words from the authorities.

Thus, according to the European Commissioner for the Economy, Paolo Gentiloni, there is no “significant risk” of infection in Europe; According to the Bank of France, French banks are “not inclined” to SVB, while President Joe Biden said Americans can “trust” a “solid” banking system and will do “whatever it takes” to keep it that way.

In response to questions from AFP, the Bank of France said it had “all the (cash, not) reserves needed to deal with peak demand”.

And if that’s not enough to reassure people, authorities have “considerable discretion” to avoid a domino effect, Wechter noted.

That’s why Treasury Secretary Janet Yellen, the US Central Bank (Fed) and the Federal Deposit Insurance Corporation (FDIC) decided on Sunday to allow SVB customers to withdraw all their deposits.

In addition, the Fed promised to lend the necessary funds to other banks that would need them to fulfill their customers’ withdrawal requests. “The rules are designed to be changed when there is systemic risk,” Duard says.