MEPs from the Economic and Monetary Affairs (ECON) Committee exchange with Andrea ENRIA, Chair of the Supervisory Board of the ECB and by Jose Manuel CAMPA, Chair of the European Banking Authority (EBA) on the failure of the Silicon Valley Bank (SVB) and the implications for financial stability in Europe. Opening statements by Andrea ENRIA, Chair of the Supervisory Board of the ECB and by Jose Manuel CAMPA, Chair of the European Banking Authority (EBA).

Brussels

exchange of views

EU - USA (T)

Committee on Economic and Monetary Affairs

banking supervision (T)

financial supervision (T)

ENRIA, Andrea (IT)

TINAGLI, Irene (S&D, IT)

Exchange of views on the failure of the Silicon Valley Bank (SVB) and the implications for financial stability in Europe: opening by Irene TINAGLI (S&D, IT) and statements by Andrea ENRIA (ECB) and by Jose Manuel CAMPA (EBA)

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, Thank you very much, Madam Chair. The failure of some mid-sized US institutions over these months remind us that specific features of banks business model can make its balance sheet particularly vulnerable to interest rate risk. In extreme cases, these can turn rising interest rates from a boost to profits into an existential threat. In this context, the case of Silicon Valley Bank is particularly illuminating. The institution concentrated both activities and the deposit taking activities among venture capital firms, fintechs and start-ups.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, More than 80% of its deposit base consists of uninsured corporate deposits, which tend to be more mobile than other deposit types. Most of the bank's assets consisted of fixed income securities, which typically lose value when interest rates rise. As deposit outflow started mounting Silicon Valley bank liquidity fixed income securities at a loss further exacerbating the granaries deposits and the strangeness on its liquidity.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, These happen in a US regulatory context where mid-sized banks like Silicon Valley Bank are exempted from or treated preferentially under relevant prudential standards,such as liquidity requirements, the LCR and the and SFR and capital requirements. Such banks are subject to less frequent stress tests than larger ones, and they can be allowed not to reflect in the regulatory capital. The realised losses of securities held in the balance sheet as available for sale.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, The episodes under consideration have been contained also by the current enforced foreign intervention of the US authorities. Which have committed to protect and ensure deposits of the banks involved under what is known as the systemic risk perception. And set up a central bank liquidity facility accepted from banks fixed income securities valid at part. There is no direct reader cross of the US events to Euro-Area significant banks.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, First and foremost, this is because the banks we supervise do not exhibit the outlier features of extreme interest rate risk and predominant reliance on concentrated uninsured deposit base, which may determine the SVD business model. Our banks generally operate with a more diversified customer base. Although uninsured deposits are an important source of funding in the euro area as well. They tend to be more relevant for business models, which are well diversified on the liability side, including their deposit base.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, Importantly, all our banks are subject to the LCR and NSFR requirements. Liquidity coverage ratio of only decreased marginally since the monetary policy normalisation process began and they averaged in excess of 160% towards the end of last year. More than half of the existing buffers of liquid assets are made up of cash and central bank reserves, which sensibly mitigate the risks of mark to market losses where liquidity needs arise.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, In fact, the recent data indicate that those banks that they've experienced some deposit outflows appear to have succeeded in maintaining their level of excess liquidity. They've done so mostly by issuing debt securities and reducing interbank lending, and only to a minimal extent by liquidating securities. The sector's overall liquidity resilience also results from the overhaul of the regulatory framework implemented in the aftermath of the global financial crisis. And the choice made by the European Union and the European Parliament in particular, to apply the international standards to all the banks operating in this jurisdiction.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, We're well aware that the ongoing fast paced normalisation of monetary policy conditions is increasing our banks exposures to interest rate risk. We started assessing interest rate risk, increase spread risks as early as the second half of 2021, when the first signs of inflationary pressures emerged and in 2022 enclosed those risks in our supervisory priorities. Last year we repeatedly measured the sector's response to standard 200 basis points shock to interest rates, highlighting that the net effect on bank profitability and capital is expected to remain positive under the baseline macroeconomic scenarios.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, The boost interest margess give to net interest income is a positive impact on banks earnings capacity. The effect this is expected to outweigh the costs associated with worsening asset quality as borrowers find it more difficult to pay back their loans. At the same time, we also review the interest rate increase spread risk management practices of the most exposed banks, and instructed them to improve the way they monitor and manage the negative impact the rising rates typically have on their economic value of equity. That is the net present value of their economic worth of their balance sheet.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, When interest rate rise, the economic value of equity falls due, among other factors to the reduction in value of fixed income securities, including sovereign debt securities. These happens irrespective of whether banks measure the value of such securities at amortised cost or at market prices for the quart purposes. If not appropriately managed, and edged unrealised losses on securities, that banks hold at amortised cost, might become a concern.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, Particularly because investors and sophisticated depositors tend to focus on market values when their level of confidence dwindles on the back of changes in fundamentals or even mere rumours. During this review of risk management practices, we asked some banks to be more conservative on their assumptions, and when the assumptions they apply, when stress test increased price on financial securities.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, We also encourage them to improve the calibration, validation and backtesting of their asset and liability management models to make sure that these models properly reflect the low repayments and deposit withdrawals behaviours by customers in line with the new interest rate environment. Liquidity and funding risks have also been upgraded and our set of supervisory priorities as the normalisation of monetary policy started and the phasing out of the extraordinary central banking funding facilities came closer.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, Our supervisors began in the second half of last year to devote significant attention to the sustainability of the bank's funding plans. Both Euro-Area banks and supervisors are therefore focusing on the risks and risk management practices that are most relevant given the fast pace of change in the interest rate environment. The market turmoil triggered by the failure of the U.S. banks have been further aggravated by the significant drop in share prices and spiking credit default swap spreads experienced by crisis Swiss last week.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, While Euro-Area banks show their share prices tumble, their final liquidity positions were not materially affected, reflecting the continued resilience of the sector. Credit Suisse, a global systemically important banks, engaging a complex refocusing of its business model was already subject to significant liquidity outflows in the last quarter of 2022. In order to restore trust, the Swiss authorities provided Credit Suisse with a large volume of liquidity support, and the details of the bank's acquisition by UBS were finalised over the weekend.

SOUNDBITE (English), Andrea ENRIA, candidate for the position of Chairman of the European Banking Authority, The ECB has issued a statement welcoming this outcome and we are clarifying a joint statement the Single Resolution Board and the EBA, that the hierarchy of claims is clearly defined in our resolution framework and CET1 capital would always be first observe losses and will be fully written down before additional Tier 1 instruments could be written down. This approach has been consistently applied in past cases and we will continue to guide the actions of the SRB and the ECB supervision in all crisis interventions. Thank you.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, Thank you, Chair and honourable members of this Committee of the European Parliament, thank you for this timely invitation to exchange views. In the past days, we have been confronted with events that have raised concerns on the health of banks and increased volatility in financial markets.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, First, it was described there were bank failures in the U.S. These bank failures were idiosyncratic in their business models and affected U.S. banks with only limited exposure to the European banking sector, a very concentrated client base with large uninsured deposits and has been described. A lack of proper risk management have paved the way for the liquidity challenges that morphed into solvency concerns, leading ultimately to super resolution by the U.S. authorities.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, Uncertainty remains on the situation of some regional banks in the U.S., with proposals from the private and public sector to provide liquidity support in a time to stabilise deposit flows for certain regional banks. Then there was last week the situation with Credit Suisse was here a prolonged restructuring of the bank that have been repeated a risk management failures made markets and investors lose confidence.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, Two years ago. Credit Suisse have already lost $5.5 billion during the year cello's collapse and other issues, including Greensill exposures in their funds and the weakened franchise was losing customers, raising concerns on the viability over the medium term, which materialised over the weekend.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, Those failures hit a time of heightened uncertainty and geopolitical risk in the macro context, a major societal in response to the energy crisis and to climate change needs US monetary policy is changing course. There's no time for complacency. Over the past decades, we have faced low interest rates. Now, with a gradual increase in rates, banks were beneficiaries in the short run of this increase in rates, their profitability increased last year as net interest income and interest margins gains materialised throughout the year.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, But on the other hand, as we weren't, an increase in interest rates have impacted also valuation of financial assets and the spectetion of potential deterioration of credit quality going forward will continue. But the policies have also become more sensitive to interest rate differences and becomes susceptible to be moved at short notice.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, Particularly with the increase in digitalition and instant communication, than they easily accelerate the quest for the passage yields across the world. These issues raise questions on the viability of some business policies over the last two weeks and I think a pinch of uncertainty on financial stability that made them reinforce a downward spiral in overall trust.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, Therefore, all banks, I think, regardless of size and complexity, need to manage this new environment with in which rising interest rates and increased volatility it's key to the macro outlook. At this point in time we're confident that more than a decade of war has put the EU banking system in a better situation to address these challenges. Banks have better capital and liquidity positions.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, The relative framework of the single rulebook has added a layer of resilience to the system and enhanced supervision and governance provides also better risk management. The banking sector today shows capital ratios are lower ratios than standard comfort levels with a collective Tier one ratio fully loaded of about 50% and a level ratios of fully lows of 5.5%.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, EU banks vastly exceed their minimum liquidity requirements as stipulated by the LCR at the insofar ratios and the ABA were closely coordinated and monitor the situation, exchange views with our BoS members whenever needed to assess the situation. The single rulebook also provides a robust regulatory framework.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, The comprehensive application of the Basel framework to all banks operating in the EU further ensures the resilience the European regulatory framework, particularly as was already mentioned by Andrea, the Basel standards on liquidity ratios here on this far have been fully implemented, both on an individual and consumer level in the EU banks. This contracts with the U.S. for international relative standards only apply to the most significant, important banks.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, As we have learned with SVB with Silicon Valley Bank, even the failure of a less significant bank could trigger a crisis of confidence with knock on effects to other banks. And this shows that completing the regulatory package with a timely and loyal finalitation of that's a package it's important from my perspective. Enhanced supervision on governance also by banks has put us in a better position to assess risks in a more forward looking manner.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, For instance, the sensitivity of bank to changes in the interest rates has been in the focus of EU regulators and supervisors for over a year. We had the EBA would published a comprehensive regulatory package on the management of interest rate risk in the banking book last fall. And increased scrutiny of the way banks are managing this risk by launching a new impact study on this issue earlier this year.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, As mentioned also by Andrea, the ECB banking supervision performed a review last year of the interest rate on credit spare risk management practices on the significant situations in the Euro-Area. We're currently in the middle of performing the ABS stress test exercise, now hopefully will provide further evidence on the resilience of the largest banks in the union.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, We have increased coverage for this exercise in a number of banks included 70 banks compared to the previous with 50 banks in 2021 and would use particularly severe assumptions in the adverse scenario. The best scenario puts banks to the test of high and persistent inflation on interest rates and a severe GDP contraction. It also enhances the sector the composition of the scenario to more stress the credit portfolios of banks.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, This is stress that the focus on solvency concerns and should provide additional clarity on the resilience of banks in another scenario. Recent crises showed that despite having enhanced banks capital and paid positions, having a strengthened regulation and enhanced supervision bank failures, a lack of confidence may still take place in the system. We therefore need to remain vigilant and not be complacent.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, I would say three ticks are ways for policymakers and regulators from the evolution of the last weeks. First, upholding the confidence in that circulatory framework requires, as I mentioned before, to complete the pending regulatory packages. We have to implement Basel three standards fully timely and faithfully. The completion for me, also, the other pending legislative files such as the AML package, will foster market confidence by providing better supervision and enhancing also the scope of supervision to the areas and new players, such as in areas such as crime prevention in the financial sector. And I think that will also enhance resilience.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, Second, as is well known, the European banking sector remains fragmented along national lines and there is no rationale for Europe to keep the banking union resting in two pillars only. Proper risk and capital allocation need the foundation of a common deposit insurance scheme and a crisis manging framework that also needs to be a strength to reduce fragmentation and divergence across the Union.

SOUNDBITE (English), José Manuel CAMPA FERNÁNDEZ, Chairperson of the European Banking Authority, Finally, likewise, the capital market union remains incomplete. Both of these large progress merit proper translation from political ambition into reality to prepare our economy for potential more volatile times to come, but more important, also to address the funding needs of our future economic growth. We will continue to monitor the banks and we stand ready to provide respect is going forward. Thank you very much for the invitation and I look forward to your comments.

Exchange of views on the failure of the Silicon Valley Bank (SVB) and the implications for financial stability in Europe: opening by Irene TINAGLI (S&D, IT) and statements by Andrea ENRIA (ECB) and by Jose Manuel CAMPA (EBA)

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