Banks vulnerable to shocks
ECB warns of “fragile” financial stability
05/31/2023 12:59 p.m
Bank failures in the US and Switzerland have revealed cracks in the global financial system. The ECB warns that banks in the euro area are also vulnerable to these shocks. One of the problems for the financial institutions is caused by the central bank itself with its rate hikes.
According to the European Central Bank (ECB), banks in the euro area are still vulnerable to external shocks. Against the background of the most recent bank stress outside the monetary union, the prospects for financial stability as a whole “remain fragile”, the central bank said on the occasion of the presentation of its semi-annual financial stability report. In the USA, three regional banks had collapsed since the beginning of March after enormous withdrawals of funds due to liquidity concerns. In Europe, the major bank Credit Suisse, which had previously had problems, was saved from collapse thanks to a state-organized emergency takeover by the larger UBS.
A problem for the institutes: the rapidly increasing interest rates after years of zero and negative interest rates. “Price stability is crucial for long-term financial stability,” said ECB Vice President Luis de Guindos. “However, if we tighten monetary policy to bring down high inflation, it can expose vulnerabilities in the financial system.” According to the ECB, the financial institutions in the euro area have coped well with the recent stress. “But higher funding costs and lower asset quality could hurt profitability.”
Banks may need to set aside more funds for possible loan losses. “In this context, it is essential to complete the banking union and, in particular, to create a common European deposit guarantee system,” the central bank affirmed. For years, Europeans have been arguing about cross-border safeguarding of customer funds as the third pillar of the European banking union, alongside joint banking supervision and joint resolution of crisis institutions. There is resistance in Germany, where there are well-stocked pots for emergencies. Savings banks and cooperative banks fear that their money will be used to finance institutions in other countries that are in distress.