March 22, 2023

The European Central Bank pushed through a significant rate hike on Thursday, dismissing forecasts that it could slow growth as the US bank collapses and problems at Credit Suisse fuel concerns about the impact of higher rates on the global banking system.

The ECB rates rose by half a percentage point on Thursday, underscoring its resolve to fight high inflation. In a statement, the bank called the banking sector in the 20 euro-using countries “resilient” with strong finances.

It says it is “closely monitoring current market tensions and stands ready to respond as necessary to maintain price stability and financial stability in the euro area.”

ECB President Christine Lagarde said last week that it was “very likely” the bank would raise its benchmarks by half a percentage point, part of a series of rapid rate hikes aimed at bringing inflation down from 8.5%, well above the bank’s target. , two percent.

This was before a Silicon Valley bank in the US collapsed last week after suffering losses on government bonds that fell in value due to rising interest rates. Then this week, globally connected Swiss bank Credit Suisse tumbled, forcing it to turn to the Swiss central bank for an emergency loan.

Trouble at Credit Suisse dragged down shares of strong European lenders such as Deutsche Bank, BNP Paribas and Societe General on Wednesday. The bank’s shares rebounded on Thursday.

Analysts say the stock sell-off was driven by investor fears that banks were taking extra risks to boost investment returns during years of very low interest rates, and some may not have been able to protect themselves from these assets going bad as growth rates.

Similar questions for the US Federal Reserve

Similar questions are being raised about what the US Federal Reserve will do at its interest rate meeting next week.

Fed Chairman Jerome Powell said just last week that the final rate level would be “higher than previously predicted,” prompting some analysts to predict the Fed would raise rates by half a point after slowing to a quarter point in February. Since then, expectations have shifted again towards a quarter point.

Federal Reserve Chairman Jerome Powell speaks at a press conference at the Federal Reserve Board Building in Washington, DC, July 27, 2022. Analysts predict that next week the Fed will raise interest rates in the US by half a point. (Manuel Balce Seneta/Associated Press)

European finance ministers said their banking system was not directly related to the bankruptcies of Silicon Valley Bank and other US Brothers banks in 2008, and in 2008-2012, taxpayer funds provided financial assistance to European banks in the amount of 600 billion euros.

The European Union’s sweeping post-Lehman banking reforms forced banks to hold larger financial buffers against losses and placed the largest banks under the ECB’s watchful eye from national supervisors who were seen as turning a blind eye to the problems piling up in their home markets. banks.

European banks are also complying with international rules that increase the amount of cash they must have on hand to cover deposits. Small US banks were exempted from this rule; Silicon Valley was one of them.

But all this did not prevent the collapse of the American banking system from becoming a serious threat to the ECB. On Wednesday, there were new signs of concern, when European bank shares fell 8.4%.

Number one Credit Suisse Shares of the Swiss bank 2 plunged 30% after its largest investor, the National Bank of Saudi Arabia, said it could not provide further financial support.

Credit Suisse, whose problems predated the collapse of Silicon Valley Bank, then turned to the Swiss National Bank for a loan of up to $54 billion to stabilize its finances, sending its shares soaring 30% on Thursday. This led to a rise in the shares of broader banks.

Oversight stronger than in 2007

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 “grossly undercapitalized and poorly supervised.” He also said that the ECB is closely examining the impact of higher rates on its banks.

“Having said that, if our conversation had taken place a week ago, I would also express confidence in US banking supervision,” he said, calling the collapse of US banks evidence of a “rather inexplicable supervisory failure” by the US Federal Reserve. . . .

“And so because the Fed has that status, it creates a kind of doubt across the board about the quality of supervision and whether what we think we know about banks is really true,” Veron said.

A woman walks in the center of London.
A woman walks down the street in a shopping district in central London Thursday, February. December 2, 2023 The ECB raises rates at an unprecedented rate to contain inflation driven by higher energy prices linked to Russia’s war in Ukraine. (Kin Cheng/Associated Press)

The Silicon Valley Bank collapsed after it suffered losses on government bonds that fell in value due to rising interest rates. The US Federal Reserve and other central banks are raising rates sharply to fight inflation. The collapse of the SVB raised concerns that the rapid rate hike could lead to further problems in the banking system if banks sustained similar losses on their balance sheets.

The ECB is raising rates at an unprecedented pace to contain inflation driven by higher energy prices linked to Russia’s war in Ukraine. ECB benchmarks affect the cost of credit in the economy, making it more expensive to buy things or invest in new production. This cools demand for goods and eases upward pressure on prices.

The ECB’s rate on loans to banks was raised to 3.5% and the rate it pays on deposits it takes from banks was raised to 3%.

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