FRANKFURT/LONDON (Reuters) -European Union banks have cash buffers “vastly” above mandatory minimum levels to cope with market shocks, but lenders should not be complacent given they risk being “caught off guard” by rising interest rates, EU banking regulators said on Tuesday. Investors are on edge after start-up focused lender SVB Financial Group, which did business […]
European banks have cash but shouldn’t get complacent, regulators say
FRANKFURT/LONDON (Reuters) -European Union banks have cash buffers “vastly” above mandatory minimum levels to cope with market shocks, but lenders should not be complacent given they risk being “caught off guard” by rising interest rates, EU banking regulators said on Tuesday.
Investors are on edge after start-up focused lender SVB Financial Group, which did business as Silicon Valley Bank, collapsed on March 10 in the largest bank failure since the 2008 financial crisis.
Liquidity challenges also led to a further two U.S. banks failing, and Credit Suisse was taken over by UBS over the weekend to restore confidence in the Swiss financial sector.
“There is no direct read-across of the U.S. events to euro area significant banks,” Andrea Enria, the European Central Bank’s top banking supervisor, told the European Parliament’s economic affairs committee.
“We do have the strong trust of depositors in European banks which we think is well placed.”
The U.S. failures have thrown a spotlight on liquidity at banks or the ability to withstand short-term outflows without having to eat into capital buffers or require outside help.
“EU banks vastly exceed the minimum liquidity requirements,” Jose Manuel Campa, chair of the EU’s European Banking Authority, told the committee.
Enria pointed out that medium-sized U.S. banks, unlike those in the EU, are not required to comply with global Basel norms on liquidity, and those that collapsed had an “extreme business model” based on deposits from fintech companies and cryptoasset providers.
Campa cautioned there was no time for complacency in the EU either given rising interest rates that are hitting the valuation of assets on banks’ balance sheets.
Enria too warned that a sharp rise in borrowing costs over the past year meant lenders could no longer rely on cheap funding and rising financial markets.
“Increasing interest rates and quantitative tightening require banks to sharpen their focus on liquidity and funding risks,” said Enria, introducing the ECB’s annual report on banking supervision.
“There is a risk that banks might be caught off guard,” he warned.
The ECB’s report warned banks about a likely hit to their net worth as borrowing costs rise.
This was a major problem at SVB, which had invested customer deposits without hedging itself against the risk of rising rates, ultimately suffering a bank run.
“(Banks) should adopt sound and prudent asset and liability management modelling practices in order to capture shifts in consumer preferences and behaviour when interest rate regimes change,” Enria said. “They should also carefully monitor risks arising from hedging derivatives.”
Credit Suisse also suffered massive deposit outflows, especially from its international business, after a string of scandals.
Large euro zone banks had a Common Equity Tier 1 ratio – a gauge of their solidity in which their capital is measured as a percentage of risky assets – of 15.3% on average at the end of last year, up slightly over September, Enria told European lawmakers later on Tuesday.
Their liquidity coverage ratio, which is the stock of high-quality liquid assets banks need to own as reserves to survive a months’ worth of outflows, was 161%, down slightly compared to September but still well above requirements.
(Reporting by Francesco Canepa and Huw Jones; Editing by Catherine Evans)