The European Commissioner for Financial Services, Mairead McGuinness, said that the European Union should closely monitor the impact of the failures of the three US banks – Silicon Valley Bank, Signature Bank and Silvergate Bank – on the European banking sector and draw the necessary regulatory consequences, during a debate in the European Parliament plenary session on Wednesday 15 March.
At this stage, “the direct impact on the EU appears to be limited”, said Ms McGuinness. “Silicon Valley Bank has a very limited presence in the EU. (...) [Its] German branch had lending, where BaFin has already issued a moratorium, but no deposits. In Denmark and Sweden, Silicon Valley Bank was present with representative offices, but had no operating branch gathering deposits”, she added.
The Commissioner noted the changing international economic situation, including high inflation and rising interest rates, as a new environment to which the banking sector must adapt. “Higher inflation and rising interest rates do not pose the same challenges to financial stability as low interest rates for a long time”, she said, noting that Silicon Valley Bank’s woes stemmed from losses in its long-term, fixed-rate bond portfolio.
Basel Committee standards. And, according to McGuinness, because the US does not apply the Basel prudential standards, including the requirement to hold sufficient liquidity in the event of depositor withdrawals, to medium-sized banks such as Silicon Valley Bank, the Californian bank’s structural weaknesses were not detected in time. However, in her view, any internationally active bank should be subject to the international standards of the Basel Committee.
“The Net Stable Funding Ratio makes it much harder for banks to finance long-dated, illiquid assets with a volatile deposit base prone to fast withdrawals”, she said. And stressing that in the EU, these prudential rules to guard against risks of liquidity, interest rate and unrealised losses, which constitute an important level of security, apply to “all banks”.
As negotiators from the European Parliament and the EU Council began interinstitutional negotiations on finalising the introduction of the ‘Basel III’ agreement in the EU (see EUROPE 13106/19), Ms McGuinness pointed out that provisions on the supervision of third country branches are among the issues to be addressed. On this point, the Parliament’s position is more rigorous than that of the EU Council, which has weakened the European harmonisation of rules in this area (see EUROPE 13104/9).
Finally, the Commissioner considered that these events illustrate the importance of having a robust and operational framework for banking crisis management. Desired by the Eurogroup as a further step towards deepening the Banking Union in the eurozone, the European Commission’s legislative proposal has been delayed by several weeks. Among the difficult questions is the Eurogroup’s request to extend the scope of a bank resolution and, therefore, the means available at European level to finance this extension. (Original version in French by Mathieu Bion)