Reduce the risk of financial crises in the future. It is with this objective in mind that the European Central Bank (ECB) and the American Federal Reserve (Fed) decided to strengthen the control of banks, while the bankruptcy of regional banks in the United States in March, then the failure of Credit Suisse, raised fears of new financial turbulence.
Liquidity monitoring
This Saturday, the ECB announced that it wanted to monitor the liquidity situation of banks in the euro zone more frequently.
“We have decided to ask banks, from September, to send us information on a weekly basis, in order to have more recent data and to better monitor liquidity developments,” said Andrea Enria, the chairman of the Supervisory Board, the European banking supervisor part of the ECB.
“The idea is to send more frequently the information on the liquidity that the banks already send us monthly,” said clarified in an interview with the Italian economic daily Milano Finanza published on Saturday on the ECB website. This data includes details such as the maturity of cash held in banks’ accounts, their counterparties and refinancing operations carried out with the ECB. This should make it possible in particular to better control the evolution of “the most liquid assets, such as bank deposits”, added the supervisor.
This initiative responds to a recommendation made in June by the European Banking Authority, the EBA, the regulator which lays down the rules for the sector.
At the same time, the European Union adopted at the end of June new stricter rules imposed on banks in order to avoid a repeat of the 2008 financial crisis (calculation of the risks present in banks’ balance sheets, minimum capital requirements). In this context, Andrea Enria called for greater cross-border consolidation of the European banking sector. “A more integrated market” of European banks, “would be beneficial because it would better deal with possible shocks,” he said.
More capital for US regional banks
Across the Atlantic, the Fed indicated on July 10 that it wanted to impose a higher level of capital on medium-sized banks to avoid further bankruptcies and destabilization of the sector, like the crisis in the spring. In absolute terms, the banking sector is supposed to apply the so-called Basel III rules, a set of proposals imposing in particular minimum capital in order to avoid, as during the 2008 financial crisis, that governments are forced to rescue institutions threatened with bankruptcy. But the United States has chosen to impose these rules only on their major brands, with more than 700 billion dollars in assets or carrying out part of their activity abroad. The fall of Silicon Valley Bank (SVB) in March and the turmoil in the sector, along with the fall of other regional establishments, prompted US regulators to review their approach.
“I will recommend that the enhanced capital rules apply to banks with $100 billion in assets or more. (…) This implies that more establishments will be affected than in the current framework”, indicated less than 15 days ago the vice-president of the Fed, Michael Barr, in a speech in Washington.
The Fed’s proposals are only expected to come into effect “in at least several years” after public consultation and a transitional compliance phase.
In practice, these establishments will have to have 2 additional percentage points of their assets in equity, in order to be able to cope with any shocks.
“Our experience shows that even a bank of this size can cause tensions likely to spread to other establishments and to call into question financial stability”, justified Michael Barr, recalling that the absence of liquidities was one of the causes of the fall of SVB.
The central bank believes that as it stands, “ most banks already have enough capital to meet these new requirements “, explained the manager. According to him, others will be able to fill them “ in less than two years, while paying their dividends “.
A regional bank specializing in deposits for companies in the tech sector, SVB was put in difficulty in March by the rise in Fed rates which resulted in a devaluation of part of its assets when it had to face a massive outflow of capital. The American financial sector then experienced several weeks of tension, marked by the fall of regional establishments such as Signature and First Republic.
The Fed, along with the Treasury Department, have since sought to reassure markets, saying the U.S. financial sector was “ strong and resilient “. But, pointed out Michael Barr, each major bank has its own internal credit risk assessment model and they tend to underestimate “. He therefore pleads for a standardized approach which would also make it easier for medium-sized banks.
The American Banking Federation (ABA) expressed disappointment with ” the determination by Michael. Barr of wanting to strengthen banks’ capital despite ” evidence of their sound capitalization “. According to the ABA, the Fed does not sufficiently take the measure of the negative consequences require banks to increase their capital “, claiming that it would have a” cost to economy “.
Divergence at the Fed
These proposals could be the subject of some opposition within the Fed Board itself. Michelle Bowman has already spoken out against the idea of new supervision rules without ” impartial and independent investigation on the causes of the turbulence in the banking sector.
“We have to be careful about what went wrong,” she noted at the end of June. “A misperception and misunderstanding of the root causes” of these bankruptcies could have “negative effects on banks and their customers”.
Another proposed measure: increase the proportion of banks’ long-term debt, which should “improve a bank’s ability to cope with difficulties because long-term debt can be converted into equity and thus be used to absorb losses” possible, underlined Michael Barr. The vice-president of the Fed also suggested reviewing the conditions of the stress tests, which make it possible to regularly check the sector’s ability to withstand different crisis scenarios.
Successful stress test for major UK banks
The biggest British banks, such as HSBC or Barclays, have successfully passed a test of their resistance to a major shock, even if the rise in interest rates is putting pressure on the British financial system, the Bank of England said ten days ago.
“We recently tested the major British banks using a scenario based on economic projections much worse than those we expect,” detailed the BoE on the occasion of the publication of its semi-annual report on financial stability.
Unemployment rate at 8.5%, inflation at 17%, house prices falling by 31% and global recession: according to the central bank, the eight largest British banks could survive such a disaster scenario without triggering a chain reaction as was the case during the great financial crisis in 2008.
Barclays, HSBC, Lloyds, Nationwide, NatWest Group, Santander UK, Standard Chartered and Virgin Money were tested. The BoE, on the other hand, is concerned about the weight gained in recent years by the “ shadow finance as non-banking financial players are nicknamed. Last September, after ultra-costly budget announcements from the short-lived government of Liz Truss – on which the executive had returned – the rate of very long-term debt in the United Kingdom had soared, a movement exacerbated by investments from pension funds, pushing the BoE to intervene in the market to stabilize it. The BoE has therefore decided to extend its “ stress testing to these non-banking establishments.
“Vulnerabilities persist in market finance, which could become more visible with rate hikes,” the central bank warned.
The recent rise in interest rates, which the BoE raised 13 times to fight inflation and which are currently at 5%, is indeed putting the financial system under pressure, the central bank acknowledges. For households, which see the rates of their mortgages soar in turn, the difficulties should worsen over the year, she warns. The BoE estimates that the share of households with a monthly repayment that is too high in relation to their income should increase to reach 2.3% of British households at the end of 2023, or 650,000
And by 2026, one million households will see their monthly payments increase by £500 or more, the central bank warns.