Don’t panic about the panic, says top bank regulator

Don’t panic about the panic, says top bank regulator
Опубликовано: Wednesday, 29 March 2023 10:15

Resolution board chief says banks and authorities would find it difficult to withstand crisis of confidence.

BRUSSELS — The EU shouldn’t ignore financial-market jitters over the health of the banking sector, the head of the European authority for managing bank failures said, as he warned a lack of trust could spiral despite the resilience of the sector.

Bank stocks have been pummeled in recent weeks, including a dramatic slide in the share price of Deutsche Bank on Friday following the collapse of Credit Suisse a week before. That’s led to fears Europe could be on the cusp of another full-scale bank meltdown similar to the 2008 version that ripped across the world and preceded debt turmoil in the eurozone.

“If I tell you that the markets are irrational, you will tell me, well, it is perhaps you who are not entirely rational not to consider the risks which the market participants consider,” Dominique Laboureix, the chair of the Single Resolution Board, told POLITICO in an interview. But he added that authorities needed to look at the situation more comprehensively than just what "market participants perceive as bad."

The panic stalking markets is partly driven by concerns the crisis could escalate, like 15 years ago when unexpected losses on banks’ books reverberated around the system and resulted in taxpayer bailouts.

EU politicians and regulators have repeatedly tried to reassure investors that the EU sector is now resilient — but, as financial markets show their nervousness, that’s achieved limited success.

Laboureix, who took charge of the EU authority in January, said it was natural the markets looked for the next weak link after the hasty buy-out of Credit Suisse by UBS.

“That’s a very legitimate attitude by market participants, but then it should be based on a real situation,” he said, arguing the reality is EU banks are well capitalized, have ample cash on hand and have sufficient “sticky” deposits — people who aren’t planning to take money out.

Dwarf other concerns

The peril for EU authorities is that if market worries trigger a major bank run, even the best-capitalized lenders may struggle to withstand a mass of withdrawals. And that’s when market confidence, or lack of it, can dwarf all other concerns.

“When the lack of trust supersedes the other elements, in that case, it becomes extremely difficult for a bank and its authorities to withstand the consequences,” said Laboureix, previously the head of the French authority for banking supervision.

That’s also where the SRB would come in. Set up after the 2008 financial crisis, it makes sure eurozone banks are prepared for a collapse so that shareholders and creditors bear losses in a failure — rather than the taxpayer — through a process known as “resolution.” If a bank teeters over the precipice, the Brussels-based agency steps in to manage the fallout.

Swiss authorities’ decision to pursue a hasty merger between Credit Suisse and UBS, upending which creditors swallow losses and provide public guarantees to get the deal over the line, raised questions about whether big banks remain “too big to fail” despite years of reforms.

Still untested

But Laboureix said the EU’s rules and toolkit to deal with failing lenders would be able to cope with “all types of banking crises” — without drawing on public money. “We are equipped with a toolbox which can address banks failures, be they big banks or small banks,” he said.

It’s natural for the markets to look for the next weak link after the hasty buy-out of Credit Suisse by UBS | Arnd Wiegmann/AFP via Getty Images

Still, he acknowledged the tools to handle the collapse of a major global bank are “untested.”

“And frankly, who would like to test it?” he said. “So, if you ask me: ‘But are you sure?’ Once we will have a case, we’ll know. And what I can say is that I’m sure that we can use the toolkit.”

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