- According to Andrea Enria, Chair of the ECB’s Supervisory Board, the financial markets remain in a “delicate phase” because of the war in Ukraine, higher inflation, and swiftly-rising interest rates.
- With that in mind, the European Banking Authority recommended weekly liquidity statistics, including maturities, counterparty types, collateral, and refinancing operations with the central bank.
- More regular and up-to-date data will allow the ECB to keep a sharper eye on liquidity developments and liabilities. It also enables them to better assess banks’ ability to deal with potential risks, when they carry out stress tests and the Supervisory Review and Evaluation Process (SREP).
To monitor the health of financial institutions, the European Central Bank (ECB) has asked for weekly liquidity data from September onward. By doing that, it can conduct more regular checks on banks’ ability to fend off potential shocks as interest rates continue to rise. Below, we explore the ECB’s request. But first, some background.
Demise of Silicon Valley Bank
The collapse of top tech lender Silicon Valley Bank (SVB) in March 2023 – the sixteenth largest bank in the US and worth over $200 billion – highlighted that large institutions can fail. After investing heavily in long-dated US government bonds – deemed “safe as houses” – issues arose when the Federal Reserve began to hike interest rates.
Since bonds have an inverse relationship with rates, SVB’s portfolio lost substantial value. Ordinarily, that’s not a problem, because banks hold onto bonds for a long time. But in this case, SVB’s customers became needier for cash and started taking out funds, meaning SVB had to sell its own assets at a loss to meet withdrawal requests – to the point the bank became insolvent.
Collapse of Credit Suisse
In the same month, UBS bought its rival Credit Suisse for around $3.3 billion. Previously sitting among a group of 30 banks known around the world as systematically important, the second-largest bank in Switzerland faced scandals in recent years, as well as management shifts, failure to effectively manage risk, and significant losses.
Following an unsubstantiated rumor in 2022 that Credit Suisse was facing trouble, clients began to pull funds. Not long after, Saudi National Bank, their top backer, refused to give them more money. The downfall of SVB and Signature Bank didn’t help matters, either.
Supervision & controls
These examples of how quickly fortunes can turn emphasize the need for more effective supervision and tighter internal controls within banks, and may well be one of the reasons behind the ECB’s decision to request weekly liquidity stats.
In an interview published by Milano Finanza, Andrea Enria, Chair of the ECB’s Supervisory Board, praised European banks for being stronger than before. Indeed, capital levels are satisfactory, liquidity is robust, and asset quality is better than ever. Meanwhile, profitability is growing and returning to “healthy levels”.
However, Enria also said the financial markets remain in a “delicate phase” because of the war in Ukraine, higher inflation, and swiftly-rising interest rates. Furthermore, there’s still “lots of volatility in the markets, high anxiety, and the risk profile can change very quickly”.
With that in mind, the European Banking Authority recommended weekly liquidity statistics, including maturities, counterparty types, collateral, and refinancing operations with the central bank. Following that suggestion, the ECB acted – the strategic move aims to strengthen the financial landscape and bolster resilience across Europe.
Currently, data is supplied monthly. More regular and up-to-date data will allow the ECB to keep a sharper eye on liquidity developments and liabilities. It also enables them to better assess banks’ ability to deal with potential risks when they carry out stress tests and the Supervisory Review and Evaluation Process (SREP).
Forthcoming stress test results
Indeed, the outcome of recent stress tests will be revealed soon – they’re predicted to confirm the sturdy financial foundations of European lenders. Enria forecasts the results will indicate banks can tackle possible crises head-on, because of more solid and reliable assets and greater capital levels. Subsequently, they’re in a “stronger position”.
With resilience a core aspect of the financial landscape, positive stress test results will likely play a crucial role in maintaining market confidence. And with more frequent data, the European Central Bank meets its mandate to safeguard the “safety and soundness of the banking system”.
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