Christine Lagarde regularly comes to the European Parliament, but this Monday the appearance of the President of the European Central Bank (ECB) is anything but a routine appointment. The emergency rescue of the major Swiss bank Credit Suisse and the ongoing price losses of European bank shares are causing turmoil on the markets. The banking sector is experiencing the worst confidence shock since the 2008 financial crisis.
The ECB boss needs to restore confidence – once again. Her means: Radiate normality. “The banking sector in the euro zone is resilient,” she said. The ECB is “very confident” that the banks have more than enough capital and liquidity. Lagarde praises the Swiss authorities for “acting quickly” over the weekend. This is fundamental to financial stability.
The ECB is monitoring the situation on the markets and is ready to intervene if necessary. We have all the instruments and will use them if necessary. “We have demonstrated this in the past,” said the Frenchwoman in Parliament.
Does the ECB need to do more?
National supervisors and politicians have been making similar statements for days. The central bank governors of France, Italy and Greece again emphasized on Monday that their financial institutions are solid. But it has not yet been decided whether the appeasements will help – or whether the mood of alarm on the markets will increase.
As a precaution, the ECB has already stated that it will provide banks with additional liquidity if needed. In a joint statement with several central banks worldwide on Sunday evening, it promised to make it easier for banks to exchange dollars. In crises, the US currency is particularly in demand as a safe haven. The banks have hardly used the option yet. Only one European financial institution secured $5 million, ECB data showed on Monday.
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The question is, however, whether the ECB might need to do more. The US Federal Reserve has already launched a support program that banks can use to obtain liquidity from the Fed. To do this, they deposit bonds as collateral, which are recognized at par. The banks can therefore have the paper counted at the value they receive if they hold the bonds to maturity. If the institutes had to sell the papers on the market at the moment, they would suffer high losses.
As things stand, it is unlikely that the ECB will launch a similar program – but that could change quickly. Another option would be further long-term loans from the central bank for the banks. In fact, the ECB has recently tightened the conditions for these loans under the acronym TLTRO (“targeted longer-term refinancing operations”) so that the banks can repay them. However, if there are worries about banks’ liquidity, they could potentially reverse course.
From the point of view of observers, not only the ECB and the Fed should act now, but also the politicians. “The central banks have no choice in such a situation. They have to provide liquidity,” said Thierry Philipponat of the non-governmental organization Finance Watch. The MPs, on the other hand, must finally ensure that not every bank failure immediately shakes the whole system – and therefore tighten the rules now.
There would even be an opportunity, as the EU Commission, member states and the European Parliament are currently negotiating how the internationally agreed Basel III agreement will be implemented in Europe. It is about stricter capital requirements for banks.
Last year, the European supervisors called for the Basel requirements to be implemented as fully as possible. But the MEPs and the national governments insisted on numerous exceptions for their home banks. “Typical EU behavior” is that, said Philipponat. Above all, the French government has insisted on relief for its major banks.
Economists and politicians are calling for better regulation
The price losses of the banks showed a “serious crisis of confidence”, said the economist. The combined assets of Silicon Valley Bank, Signature Bank and Credit Suisse are equivalent to just 0.5 percent of global bank assets, and yet there are such dislocations. “So investors in the markets do not believe that the rules for banks are sufficient to ensure financial stability,” says Philipponat.
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The crisis may now bring about a rethink. First politicians are calling for a review of the rules. “I expect the federal government and the financial regulator to learn from Credit Suisse’s mistakes and evaluate our regulation,” says CDU member of the Bundestag Ralph Brinkhaus. “This is also a European task. We will demand that in Parliament.”
The Chair of the European Parliament’s Economic Affairs Committee, Italian Social Democrat Irene Tinagli, says the European regulatory framework needs to be further improved, including common deposit insurance. The latter failed last year, among other things, due to resistance from the German savings banks.
More: Your money is safe now