www.local10.com
Bank turmoil casts shadow over Europe interest rate decision
Concerns about the world's banks are casting a shadow over the European Central Bank's meeting.
Economy
FRANKFURT – European Central Bank President Christine Lagarde said last week that a big interest rate increase was “very likely” at Thursday's meeting. That was before Silicon Valley Bank collapsed in the U.S. and European bank shares plunged as fears spread of more widespread troubles at a time when banks are adjusting to rapidly rising interest rates.
Markets are watching to see if the ECB will stick to its path of steep rate increases aimed at fighting inflation or dial back to a quarter-point hike.
Lagarde and the ECB have not made a public statement on the recent banking upheaval, including a stock plunge from major Swiss lender Credit Suisse and its move for financing from the Swiss central bank this week. ECB officials typically observe a silent period a week before a rate decision to avoid excessive market swings and speculation based on officials' comments.
European finance ministers have said that their banking system has no direct exposure to the failures of Silicon Valley Bank and others in the U.S. Analysts say the European banking system instituted wide-ranging safeguards after the global financial crisis that followed the collapse of U.S. investment bank Lehman Brothers in 2008 and led to 600 billion euros in taxpayer-funded bailouts of European banks in 2008-2012.
The sweeping post-Lehman banking reforms enacted by the European Union forced banks to hold thicker financial cushions against losses and put the biggest banks under the watchful eye of the ECB, taking them away from national supervisors who were considered to have turned a blind eye as problems built up at their home banks.
European banks also observe international rules that raised the amount of ready cash they had to keep on hand to cover deposits. Smaller U.S. banks were exempt from that rule; Silicon Valley was one of them.
But all that hasn't kept the U.S. banking blow-up from looming large for the ECB this week. New evidence of concern flared Wednesday when shares in European banks fell 8.4%.
Credit Suisse, the No. 2 Swiss bank, saw its shares plunge as much as 30% after its biggest investor, Saudi National Bank, said it could not provide more financial support.
Credit Suisse, whose troubles predate the collapse of Silicon Valley Bank, then turned to the Swiss National Bank for up to $54 billion in credit to stabilize its finances, sending its stock soaring as much as 30% on Thursday. That brought wider bank stocks back up.
Nicolas Veron, a banking expert at the Bruegel think tank in Brussels, said European banking supervision is much stronger than in 2007 when banks were “dramatically undercapitalized and poorly supervised.” He also said that the ECB has been carefully studying the impact of higher rates on its banks.
“Having said that, if we had had our conversation a week ago, I would have expressed confidence in U.S. banking supervision as well,” he said, calling the U.S. bank collapses evidence of “a pretty inexplicable supervisory failure” by the U.S. Federal Reserve.
“And so because the Fed has such status, this creates a kind of doubt across the board on the quality of supervision and whether what we think we know about banks is actually right,” Veron said.
Silicon Valley Bank failed after it suffered losses on government-backed bonds that fell in value as interest rates rose. The U.S. Federal Reserve and other central banks have been sharply raising rates to combat inflation. SVB's collapse raised concern that swift rate rises could lead to further problems in the banking system if banks were holding similar losses on their balance sheets.
The ECB has been raising rates at an unprecedented pace to contain inflation fueled by higher energy prices tied to Russia's war in Ukraine. The ECB's benchmarks affect the cost of credit across the economy, making more expensive to buy things or invest in new production. That cools demand for goods and eases upward pressure on prices.
The key ECB rates are 3% for short-term lending to commercial banks, and 2.5% on deposits from banks at the ECB.
Inflation at 8.5% in February was well above the bank's goal of 2%, and prices levels are taking their time to fall in response to ECB rate hikes after hitting a peak of 10.6% in October.