As Banking Worries Swirl, Europe’s Policymakers Express Confidence, With Caution
For a bank, a loss of confidence is a fatal blow. After that occurred at several banks in the United States and Switzerland in the past few weeks, policymakers in the eurozone have been trying to shore up confidence in the region’s banking sector.
At a conference in Frankfurt last week, representatives from the European Central Bank spoke confidently of the strength of the financial regulations and the intensity of the banking oversight in the 20-country bloc that uses the euro currency.
Still, in the room, there was a wariness about what might happen next, with few convinced that the dust from the recent turmoil had settled.
“While the European banking sector is resilient, with strong capital and liquidity positions, in view of recent financial market volatility, we are ready to act,” Christine Lagarde, the president of the European Central Bank, told the gathering, hosted by the Institute for Monetary and Financial Stability at Goethe University Frankfurt on Wednesday. The central bank, she added, would provide liquidity to the financial system if needed.
On Friday, the nervousness about banks swept into the eurozone. Shares in Deutsche Bank, Germany’s biggest bank and one with a history of crises, dropped as much as 15 percent, and the price of protection against a default by the bank jumped. There was no obvious direct cause for the shares to fall, but the moves provided a reminder of how quickly these jitters can spread. Germany’s chancellor, Olaf Scholz, responding to the sell-off, said that there was “no reason to be concerned” about the lender and that it had “fundamentally modernized and reorganized its business.” Nevertheless, Deutsche Bank’s shares ended the day nearly 9 percent lower, and shares in other European banks, including Commerzbank and BNP Paribas, also fell.
Despite tougher regulations since the 2008 financial crisis, European policymakers and economists acknowledge that some banks and other financial institutions could have hidden vulnerabilities.
In September, Britain’s pensions industry was suddenly in critical danger when market interest rates surged because of a change in government policy. The Bank of England quickly intervened to stem the crisis by buying government bonds. Still, the sudden jolt left analysts, traders and policymakers wondering whether something could break in markets elsewhere.
In the United States, Silicon Valley Bank’s collapse this month, which resulted in part because it had badly managed its exposure to rising interest rates, answered that question in the affirmative. In Switzerland, which is not part of the eurozone, the demise of Credit Suisse and its acquisition by rival UBS on March 19 followed management missteps over the years, and these problems were put in sharp relief by the run on bank stocks in the United States.
It’s still an open question what vulnerabilities may be lurking within the eurozone’s financial system. Despite the tumult in the banking sector, E.C.B. policymakers raised interest rates for a sixth consecutive time this month in an effort to combat high inflation. The European Central Bank has executed the fastest pace of monetary policy tightening in the bank’s two-and-a-half decade history, as rates have risen sharply around the world.
“We have been hiking quite fast,” Pierre Wunsch, the governor of the National Bank of Belgium and a member of the European Central Bank’s rate-setting committee, said in a panel session in Frankfurt. While there was a possibility that “someone somewhere did something to make them vulnerable,” he said, that isn’t a problem “if you believe that the system is strong.”
European regulators had been “torturing the data in all directions” on banks, he added, and “honestly, what we see is no problem.”
While the bloc shares a currency, it still has a fragmented banking system. This is often considered a weakness of the eurozone because it can leave banks more vulnerable to shocks depending on the economic strength of the country they are in.
The region had mitigated these gaps in the banking union with stronger bank supervision, Philip Lane, the chief economist of the central bank, told the audience in Frankfurt. There are “much tougher regulatory standards, much tougher supervisory standards, tons and tons of attention paid to interest rate risk,” he said.
Fabio Panetta, another member of the central bank’s executive board, struck a more cautious tone at the conference, which was called “The ECB and Its Watchers.” He said there was no experience that policymakers could draw upon to forecast the market impact of higher interest rates while central banks also reduce their balance sheets. That measure, known as quantitative tightening, is a way for central banks to unwind some of their huge purchases of bonds over the past decade and a half to bolster economies and stabilize financial markets during economic crises.
He added that high uncertainty had increased the demand for safe financial assets and liquidity, even as central banks were tightening policy, and that could force a so-called dash for cash, which would have “undesirable consequences,” he said.
“We have seen this in the U.K. We have seen this in the U.S.,” he added.
The eurozone shouldn’t be sure it can escape, Nouriel Roubini, an economics professor at New York University, told the room.
Mr. Roubini’s pessimistic view wasn’t a surprise (he was nicknamed Dr. Doom during the financial crisis and recently published a book titled “Megathreats”), but he homed in on the unknown risk: After the European Central Bank has raised interest rates by 3.5 percentage points in about eight months, there will be assets that have lost value.
“Those losses are somewhere in the system,” he warned the room. They need to be found, he said.
Saying everything is fine in the eurozone but not in the United States, he added, is “a bit naïve.”
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