The ECB supervisors are worried about the nervousness in the markets

Andrea Enria at the Handelsblatt conference “Banking Supervision 2023”

The ECB’s chief banking supervisor is keeping a close eye on the current situation.

Frankfurt The euro zone’s chief banking supervisor, Andrea Enria, has expressed concern over the recent plunge in bank stocks. “What really worried me was the level of nervousness that I perceived in the markets,” he said on Tuesday at the Handelsblatt conference on banking supervision.

Enria also pointed out that the market for credit default swaps (CDS) is opaque and illiquid. With the use of a few million euros on the credit derivatives market, one can influence the stock of a bank with a trillion balance sheet total, CDS risk premiums move a big bank and potentially trigger deposit outflows. “I’m very concerned about that.”

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.

The head of banking supervision at the European Central Bank (ECB) said it might make sense to achieve more transparency with CDS within the framework of the Financial Stability Board (FSB). The FSB monitors the threats to the global financial system on behalf of the G20 countries.

The bankruptcy of the Silicon Valley Bank, number 16 in the American banking market, caused upheavals in the industry almost three weeks ago. The growing uncertainty of investors ultimately led to the emergency takeover of the major Swiss bank Credit Suisse by its competitor UBS.

Supervision looks at liquidity ratios

However, the merger did not calm the markets in the long term. Deutsche Bank’s share price collapsed last Friday, temporarily losing 15 percent. This week, however, he partially recovered.

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>> Read also: Hedge fund announces short position in Deutsche Bank

The fact that the Silicon Valley Bank (SVB) had lost deposits at a rapid rate also caused a stir in the market. At the bank, which focused on tech companies and venture capitalists, customers withdrew billions within hours. The SVB had suffered heavy losses on its bond portfolio.

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You have to check whether the assumptions made in the models are still good, said Enria. Raimund Röseler, executive director at the financial supervisory authority Bafin, was even clearer: all banks that are now in trouble have met their liquidity requirements.

He pointed out that the so-called Liquidity Coverage Ratio (LCR) is the indicator for supervisors to assess liquidity risks. “It didn’t work here.”

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.

“We certainly have to talk about the regulatory key figures and rules,” said Rösler. This also includes the question of what role, for example, deposit insurance and capital requirements play. A higher quota may be necessary, “maybe you have to adjust the mechanics of how you calculate the LCR”.

Liquidity regulations force banks to hold enough cash and other readily available funds on hand in case depositors flee in large numbers. The LCR defines the minimum level of highly liquid assets that credit institutions must hold as a liquidity reserve in order to be able to meet the net payment obligations arising over a period of 30 days in the event of a severe stress scenario.

More: Bank supervisor Campa: “No crisis is like the other”

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