The European Union’s banking sector is gearing up to face intense scrutiny
over its preparedness to weather major crises without resorting to central bank funding
according to the bloc’s banking watchdog.
This call for credible options stems from the events in March when Credit Suisse required a liquidity backstop from the Swiss central bank before being taken over by UBS.
In light of this, the European Banking Authority (EBA) announced that it will commence assessments next year to ensure that national regulators are evaluating banks’ assumptions regarding liquidity in the event of a collapse. A key aspect of this evaluation will be the ability to handle potential rapid deposit withdrawals,
a factor that brought to light during recent crises in the United States and Switzerland.
Alarming evaporation of liquidity
The alarming evaporation of liquidity also underscored by the collapse of Silicon Valley Bank in the US
leading global banking regulators to review day-to-day liquidity requirements for banks.
Liquidity, which refers to the availability of readily accessible cash or short-term debt with ready buyers
to support a bank’s daily operations without resorting to asset sales, is a critical concern.
EBA Release
The EBA recently released its initial report, examining how regulators across the 27 EU countries apply “resolution” rules
introduced after the global financial crisis to prevent taxpayer-funded bailouts of banks. Resolution strategies may involve a smooth closure of a bank while transferring key activities such as deposits to a solvent lender
or implementing a recovery plan by restructuring the bank to access liquidity from markets or other sources to remain operational.
However, the report revealed that strategies and actions proposed by institutions to support liquidity in resolution limited and primarily focused on accessing central bank facilities
This reliance on central banks may prove challenging for stressed banks coming out of resolution
as obtaining liquidity from private markets can be difficult, especially without sufficient collateral.
Alternate liquidity options available to banks include asset disposal, issuing debt, or drawing on guaranteed lines of credit. As the EBA continues its assessment, the aim is to ensure that European Union banks have robust and diverse liquidity plans in place to enhance their resilience during crises and reduce their dependence on central bank assistance.
English