Posted Sep 30, 2022, 8:44 PM
This is a first since the sovereign debt crisis in Europe: the European Systemic Risk Board (ESRB), chaired by Christine Lagarde, President of the European Central Bank (ECB), issues a “general warning” to the financial system .
“The risks to financial stability in the Union and the likelihood of extreme risk scenarios materializing have increased,” he said at the end of a meeting held on September 22, even before the storm on the markets unleashed by the new British government, the conclusions of which were communicated on Thursday evening.
“Growing geopolitical tensions have led to rising energy prices, causing financial difficulties for companies and households that are still recovering from the economic consequences of Covid”, underlines the ESRB, which brings together supervisors and national central banks of the European Union. And stronger-than-expected inflation is tightening financial conditions. This makes it more complicated to repay the debt of economic actors.
The risks of falling prices of certain assets threaten to trigger significant losses in market value and amplify volatility. On the energy market, this has caused tensions on the liquidity of certain participants, explains the ESRB.
“Perfect Storm”
“We have the ingredients for a perfect economic storm” next year, said Raimund Roeseler, head of banking supervision at the German financial policeman (BaFin).
The deterioration of the macroeconomic outlook is also weighing on the quality of assets and the outlook for bank profitability, which is also affected by structural factors such as overcapacity, competition with new players in financial services and exposure to cyber and climatic.
“It is necessary that private institutions, market participants and competent authorities continue to prepare for such prospects of extreme risks”, warns the ESRB.
The committee called on supervisors in 30 countries to ensure that institutions are sufficiently capitalized to cope with a deteriorated environment. At this stage, it does not make recommendations in terms of capital, dividends or remuneration… At the height of the Covid crisis, in 2020, the European authorities imposed a ban on the payment of dividends on banks.
Banks, “first line of defense”
“Banks can act as the first line of defense by ensuring that their provisioning and capital policy correctly takes into account anticipated and unforeseen losses that could be induced by the deterioration of the risk environment”, judges the ESRB which also requires extreme attention to liquidity risks, the real lifeblood of banks in times of stress.
Some financial supervisors do not entirely adhere to this hard line, expressing surprise at the committee’s failure to take into account the increase in margins linked to the rise in interest rates, which could consolidate the profitability of the banking system.
“We must not put the financial system under unacceptable constraints. In a number of countries like France, loans are at fixed rates, which acts as a buffer against market effects and limits the risk of default, says a European banker. Faced with this crisis, which is hitting the energy sector in particular, the States will take the necessary measures if necessary, or even nationalize companies under too much pressure, such as Uniper in Germany”.
