The ECB supervisors are worried about the nervousness in the markets

Frankfurt The recent plunge in banking shares has scared Europe’s top regulator of the industry. “What really worried me was the level of nervousness I saw in the markets,” said Andrea Enria, head of ECB banking supervision, on Tuesday at the Handelsblatt conference on banking supervision.

After the bankruptcy of the Silicon Valley Bank (SVB) and the rescue of Credit Suisse, Deutsche Bank’s shares temporarily fell by 15 percent last Friday. Chancellor Olaf Scholz then demonstratively expressed his confidence in the money house.

“Of course we see a real nervousness in the market,” said Raimund Röseler, the chief bank supervisor of the German financial regulator Bafin. Financial institutions with similar problems as SVB and Credit Suisse do not exist in the Federal Republic. “Of course we have problems with some German banks, but no problem in the German banking sector,” said Röseler.

“To be honest, I don’t see the danger of a systemic crisis.” But the most recent imbalances have fueled discussions about the need for further reforms in the banking sector.

Credit default insurance risk

ECB chief supervisor Enria, for example, is concerned about the importance of the “opaque and illiquid” market for credit default swaps (CDS) for individual banks. Spending a few million euros in the credit derivatives market could affect the stock of a trillion-dollar bank, move its CDS risk premium and potentially trigger deposit outflows, Enria said. That worries him.

With credit default insurance, investors can protect themselves against the default of a company. But you can also invest in these derivatives if you want to speculate on a negative development at an institution.

In the case of Deutsche Bank, CDS prices rose sharply late last week, raising concerns about the health of European banks. After that, the share of the largest German money house had slipped in the meantime.

“We should have more transparency in these markets. Perhaps the Financial Stability Board (FSB) should review how these markets really work,” Enria said. The FSB monitors threats to the financial system on behalf of the G20 countries.

In the meantime, the supervisors are apparently specifically investigating a CDS transaction that could have played a key role in the price slide of Deutsche Bank and thus of the entire industry. According to information from the Bloomberg news agency, this was a transaction worth around five million euros.

In financial circles it is said that there was a conspicuous deal with CDS from Deutsche Bank on Thursday evening. One market participant paid a higher price for the credit default insurance than was absolutely necessary. This deal signaled a significantly higher risk for Deutsche Bank.

The suspected knock-on effect was that bank stocks tumbled on Friday, government bonds rallied and bank CDS risk premiums soared. The market capitalization of Deutsche Bank fell by around 1.6 billion euros, that of the European banking index by more than 30 billion euros.

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Some experts have the impression that financial regulators and politicians are presenting the situation of European banks rosier than it really is in order to prevent the outbreak of panic. Röseler rejects this suspicion. “I usually don’t lie. And now really not.”

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DZ Bank CFO Ulrike Brouzi also sees no reason for scaremongering. You have “understanding of the nervousness,” she said. However, there is no need for a rescue operation similar to that of Credit Suisse in the Federal Republic. “There is no other bank that has been known for months that the supervisors are discussing it.”

Karolin Schriever, Executive Board Member of the German Savings Banks and Giro Association (DSGV), assesses the situation in a similar way: “I think the banking system is very robust.” There are more banks in Europe and Germany than in the USA, including many small savings banks and cooperative banks. That has a stabilizing effect.

The bankruptcy of the SVB triggered the turmoil in the banking market. A little later, the Swiss bank Credit Suisse faltered and was merged with UBS. In both cases, investors quickly withdrew their deposits. As a result, the institutions threatened to run out of liquidity – and they had to be closed or emergency mergers.

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After these bank runs, you have to check whether the assumptions made in the banks’ liquidity models are still correct, said Enria. Röseler said: “We certainly have to talk about the regulatory key figures and rules.”

>> Read here: This is how the first bank storm triggered on social media went

SVB and Credit Suisse met the applicable liquidity requirements until shortly before their collapse, said Röseler, referring to the Liquidity Coverage Ratio (LCR). Controllers use this indicator to assess banks’ liquidity risks. “It didn’t work here,” said Röseler.

A higher rate may be necessary, maybe you have to “adjust the mechanics of how the LCR is calculated”. The Basel Committee for Banking Supervision, in which central bankers and bank supervisors from 27 countries are represented, wants to discuss this and other topics and publish the first results in June.

Raimund Röseler speaks at the Handelsblatt conference

The top bank supervisor of the Federal Financial Supervisory Authority is relaxed with regard to the banking world.

Liquidity regulations force banks to hold enough cash and other readily available funds in case depositors withdraw their money. The LCR defines the minimum level of highly liquid assets that institutions must maintain as a liquidity reserve in order to be able to meet payment obligations that arise over a period of 30 days in the event of a stress scenario.

Bank supervisors attribute the fact that deposits are withdrawn more quickly in stressful situations to the fact that news and rumors are spread more quickly – including via social media.

In addition, digitization has made it easier for customers to withdraw deposits at short notice. Many financial institutions are concerned with the question of how they can better protect themselves against bank runs. “How do you recognize that? How can you control that? These are issues that will certainly also be discussed with the supervisor,” said Brouzi.

Debate on adjustments to deposit insurance

In the US and Europe, there is a debate about whether the protection of customer funds through deposit insurance should be increased in order to prevent bank runs. “Uninsured and short-term bank deposits are one of the main reasons why we observe bankruns,” says Florian Heider, director of the Leibniz Institute for Financial Market Research SAFE. He advocates securing all demand deposits that can be terminated at short notice.

For US private investors, deposits are currently protected up to 250,000 dollars, in the EU up to 100,000 euros by law. In Germany, the scope of protection is significantly higher thanks to additional, voluntary deposit protection funds.

Bafin supervisor Röseler is open to talking about adjustments to deposit insurance, but warns of short-term changes. The German deposit guarantee system has always worked well. One should not lapse into activism. “A key element of deposit insurance is trust and it should not be experimented with.”

The savings banks, which are market leaders in German private customer business, see no need for adjustments. “We are more stable in Germany and in Europe when it comes to deposit insurance,” said DSGV board member Schriever.

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