European Central Bank (ECB) president Christine Lagarde insisted on Thursday that the single currency region’s banking sector is “in a much stronger position than it was in 2008″, as the central bank surprised many in financial markets by sticking to a planned half-point hike in interest rates even as banking stocks have succumbed to heightened volatility.
“I was around in 2008, so I have a clear recollection of what happened and what we had to do,” said Ms Lagarde, who was the French economy minister at the time of the financial crisis, noting that banks have to hold much higher levels of capital to absorb shock losses, easy-to-access cash to meet bills and are subject to tighter regulation and supervision.
Ms Lagarde said the European banking sector is “resilient” and the ECB has the tools to shore up the financial system “in case it is needed to respond to what would be a liquidity crisis if there was such a thing”. “But this is not what we are seeing,” she said.
European banking stocks whipsawed on Thursday as an initial rally after the Swiss central bank gave troubled lender Credit Suisse a €50.7 billion lifeline gave way to losses by early afternoon as a jittery market turned its focus to the US lender First Republic Bank.
Shares in the bank, which had been badly hit in the past week as fellow regional lenders Silicon Valley Bank and Signature Bank collapsed, fell in early trading in New York on reports it was weighing options including a sale. Reports then emerged on Thursday night that First Republic had received $30 billion (€27 billion) in deposits from several big banks as part of a rescue package.
Bank stocks oscillated further immediately after the ECB delivered its rates decision, before moving higher. Financial markets had moved on the previous day to price in a 0.25 of a percentage point, or 25 basis points, increase, in light of the turmoil seen in the banking sector on both sides of the Atlantic in recent days.
However, the ECB pressed ahead with a previously widely signalled 0.5 of a point hike.
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“In the end, a dovish 25 bps hike might have actually worried the market into thinking there really was a risk of a systemic failure in the EU banking system driven by contagion spreading from the US and into Switzerland, while the uncomfortable upside surprises in inflation numbers earlier this year gave muscle to the hawks,” said Altaf Kassam, State Street Global Advisors’ head of investment strategy and research for Europe, the Middle East and Africa. “So 50 bps seemed appropriate.”
The Stoxx Europe 600 Index, which has slid more than 14.5 per cent in the five sessions to the close of trading on Wednesday, closed 1.2 per cent higher. In Dublin, AIB advanced 2.3 per cent, while Bank of Ireland moved up 2.4 per cent.
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Credit Suisse, which is in the middle of a major restructuring plan following a series of scandals in recent years, issued a statement in the early hours of Thursday saying that it will borrow money from a central bank liquidity facility and is making a tender offer to buy back up to three billion Swiss francs of dollar- and euro-denominated debt.
Meanwhile, Credit Suisse’s top shareholder, Saudi National Bank, said “everything is fine” and the bank isn’t likely to seek more capital a day after it said it wouldn’t increase its stake in the bank, sparking a share price slump of as much as 31 per cent in the stock. The price ended the session up 19.2 per cent.
Ms Lagarde said the bank’s governing council is “monitoring current market tensions closely and stands ready” to respond as necessary to preserve price stability and financial stability in the euro area.
“You could read a few things into the ECB decision. One is that the fears over the banking sector are not shared by the ECB. The other is that they see the risks of elevated, embedded inflation as too great to not deal with,” said Neil Birrell, chief investment officer at Premier Miton Investors.
“It’s interesting that there is not much guidance forthcoming — being led by data in policy decisions can probably also mean being very aware of financial stress and markets.”
Small- to medium-sized US lenders are not subject to the global standards on capital, liquidity and resolution that apply to larger banks in that country and banks across the EU and UK.
However, the Federal Reserve is now reportedly considering tougher rules for mid-sized lenders. — Additional reporting, Reuters
