Supervisors are likely to divide banks into different groups depending on how vulnerable their business models are to cash outflows.
(Photo: dpa)
Frankfurt The European Central Bank (ECB) will examine the liquidity reserves of the banks in the euro zone more closely and, according to informed circles, may set stricter requirements for individual institutions this year. This is reported by the Bloomberg news agency.
In its annual bank risk review, known in industry jargon as the Supervisory Review and Evaluation Process (SREP), the ECB will pay more attention to the issue of cash management, insiders report. Higher minimum thresholds for indicators such as the liquidity coverage ratio could also be set. Banks and the ECB are already communicating more about this topic, it is said. A spokesman for the ECB declined to comment.
The near-collapse of Credit Suisse in March and the run on US regional banks such as Silicon Valley Bank brought the issue of deposits back into focus for supervisors. The ECB wonders how prepared banks are to withstand a run on their deposits and how effective the metrics investors and regulators use to assess them are.
While liquidity has always been a key part of banking supervision, in the low-interest era, capital and credit risk have been more of a focus. Since the end of 2021, the ECB has been urging banks to examine their liquidity situation. The recent collapse of US banks has exacerbated the scrutiny.
As can be heard, the ECB will receive the first results from the SREP process over the course of the summer. Supervisors are likely to divide banks into different groups depending on how vulnerable their business models are to cash outflows, it said.
Among other things, the focus is on the deposits of wealthy customers, since individual large withdrawals can quickly deplete a bank’s liquidity reserves. That was evident at Credit Suisse. Market financing and perceptions of deposit security among small savers will also play a role.
What actions the ECB supervisors can take
Bankers and supervisors in the European Union quickly dismissed Credit Suisse as a special case and emphasized that the recent turbulence in the USA cannot be directly transferred. So far there have been no runs on banks in the euro area, which is partly because they are subject to liquidity regulations and partly because, according to the ECB, they are exposed to a lower interest rate risk on average.
For example, European banks must hold more high-quality liquid assets than could outflow in a 30-day stress scenario. The ECB can increase this requirement, known as the Liquidity Coverage Ratio (LCR), but has rarely done so to date. According to the European Banking Authority (EbA), the weighted average LCR of European banks was 165 percent in the fourth quarter, well above the minimum of 100 percent.
Instead of raising the minimum LCR ratio, the ECB could also increase the pressure on individual banks as part of the SREP by expressly pointing out weak values or including them in a poorer assessment of risk management.
Recent developments and the speed of information exchange and decisions by depositors and other market participants confirm that banks’ liquidity and funding “need increased attention”, said Andrea Enria, the ECB’s chief supervisor. It was found “that we have to focus on the sustainability of the financing plans of the banks,” Enria told the finance ministers of the euro zone on Monday. “As a result, liquidity and funding risks have been given more prominence among supervisor priorities.”
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