The EBA assessment, which covers the books of over 160 European banks representing over 80% of the EU/EEA banking sector by total asset value, echoed the statement made by ECB president Christine Lagarde in mid-March: “The euro area banking sector is resilient, with strong capital and liquidity positions.”
The financial strength of individual banks and the overall health of the banking system are typically measured using a percentage called the common equity tier 1 (CET1) ratio, which represents the ratio of a bank’s CET1 capital to its risk-weighted assets. According to the EBA, the CET1 ratio for the EU/EEA banking sector increased to 15.3% in Q4 2022, up from 14.8% in the previous quarter. This improvement was “driven by lower risk weighted assets, mainly attributable to a decrease in credit risk, and an upward move in CET1 capital,” stated the EBA.
In an interview on 30 March, Frank Elderson, executive board member of the ECB and vice chair of the ECB’s supervisory board, stated: “SVB had a very unusual business model, which was highly exposed to interest rate risk and had a highly concentrated deposit base. Among the banks supervised by the ECB, the business models that rely more on deposits are more diversified.” This highlights a key differentiating factor between SVB and European banks and suggests that a similar banking crisis is unlikely to occur in the EU.
Taking a broad view at the EU economy, Elderson emphasised that “our primary tool to fight inflation is interest rates. Restrictive monetary policy lowers inflation by removing excess aggregate demand. This leads to some economic slowdown in the short term, but in the medium and long term society as a whole benefits when inflation eases. Price stability is a precondition for sustainable growth.”
ECB and EBA appear confident in bank balance sheets
Overall, both the ECB and EBA appear to be confident in the balance sheets of EU/EEA banks, particularly in terms of liquidity and capitalisation requirements. Nonetheless, “the ECB stands ready and has the necessary tools available to provide liquidity to the system if needed,” stated Elderson. This serves as a reassuring message to the markets and the public.
According to the ECB’s latest economic bulletin, the average excess liquidity in the euro area banking system decreased by €245.8bn between 2 November 2022 and 7 February 2023. However, despite this decline, the level of excess liquidity remained very ample, remaining above €4trn, underlining euro area banking system continues to have substantial liquidity available.
Moreover, the Composite Indicator of Systemic Stress (CISS)--a financial stability indicator that measures the degree of stress in a financial system, developed by the European Systemic Risk Board in response to the financial crisis of 2008-2009--has declined to 0.36 for the week ending on Friday 31 March. This is a decrease from the previous week’s value of 0.44 on Friday 24 March and the value of 0.41 on Friday 17 March. These two weeks saw increased volatility due to the downfall of SVB and Credit Suisse. The CISS scale ranges from 0 to 1, where a higher value indicates a higher risk of instability or disruption in the financial system, and a lower value indicates a more stable and resilient financial system.