Tag: Financial stability

Top global regulator warns of ‘massive adjustment’ for financial system

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AMSTERDAM — The world’s financial system needs a “massive adjustment” to cope with higher interest rates, and key rules will have to be revisited, according to a top global regulator.
Klaas Knot, chair of the Financial Stability Board, an international standard-setting body, told POLITICO that rising interest rates fueled problems at several regional U.S. banks and similar losses may show up elsewhere.
“The speed with which interest rates have changed, that, of course, implies a massive adjustment in the financial system,” the Dutchman said in an interview from his office in Amsterdam. He added it was unclear exactly where those losses would be.

“In many, many places of the financial system, that adjustment will go well because it has been well-anticipated and has been well-managed. But history teaches us that is not always the case everywhere.”
The warning of potential trouble ahead echoes fears of other global officials and comes after the failure of Silicon Valley Bank, a $200 billion lender to the tech sector, sparked contagion across U.S. regional banks. The subsequent market panic contributed to bringing down Credit Suisse in Europe, forcing the Swiss government to hastily merge the lender with UBS.
Any domino effect can have huge impacts for the economy, businesses and households.
“We’ve seen the impact of rapidly changing interest rates manifest in the second tier of the regional U.S. banks,” Knot said. “But I would be very surprised if that was the only sub-sector of the financial system where you would have a significant impact.”
Despite the turmoil, Knot said he was more worried about risks stashed at “nonbanks” — a term that encompasses investment funds, insurers, private equity, pension funds and hedge funds — where authorities have less visibility on hidden losses.
“If they are hidden for a very long period of time, sometimes the problem then grows so big, that it only becomes unhidden or visible when it’s too big to deal with,” he said.
The FSB boss pointed to financial players that took the wrong side of a bet on interest-rates and may now be nursing losses. “I hope, of course, that this is well-dispersed over the financial sector,” he said. “Where we are worried is specific concentrations of such risk.”
In particular, he said, those losses could be amplified when there is a mismatch between hard-to-sell assets and easy withdrawals, and borrowed money is used to juice returns.
That combination has worried authorities for some time — but Knot said this didn’t mean regulators are behind. For instance, the FSB, whose membership includes central bankers, financial regulators and finance ministries, will issue recommendations for open-ended investment funds in July.
Under the plans, regulators would get more powers to trigger restrictions in a crisis, rather than leaving those decisions in the hands of the fund manager.
Rewriting the rules
The financial rulebook will need to be revisited substantially in light of recent events, he said.
“It’s a mistake to see the regulatory framework as something that is fixed, and something that should not be touched,” he said. “The financial industry is not at all fixed, it is continuously evolving. So, the regulatory framework should evolve with the evolving risks.”
The Dutchman said this means revisiting assumptions about how quickly banks can sell assets to meet depositor withdrawals, the speed of those withdrawals in a digital era, and the reserves that have to be set aside to cover potential unrealized losses from interest-rate risks — all of which were factors in the U.S. bank collapses.

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( With inputs from : www.politico.eu )

April 28, 2023
The tension at the heart of the ECB

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FRANKFURT ― The markets are jittery and inflation still needs taming. Coming together, those two things put the European Central Bank in a real bind.
Fight one fire and it could cause the other to flare. The ECB can keep raising interest rates to try to get inflation under control, but that risks fueling financial market tensions. Conversely, it can give banks some breathing space by slowing its rate-hiking, but that carries the danger of prolonging the region’s economic malaise.
Frankfurt’s official line is that it can do both with no serious consequences. Many economists in the eurozone don’t buy that.

In private, it’s a dilemma that splits the ECB’s decision-makers, and even in public differences of opinion are bubbling to the surface. Here’s what’s at stake:
Why is the ECB raising rates?
The idea is that increasing interest rates subdues inflation because it makes consumers and businesses less likely to borrow ― so that results in reduced spending.
As inflation has started to pick up since last summer, the ECB has raised interest rates at a record pace. They’ve gone from -0.5 to 3 percent as the annual rate of price rises has surged to a eurozone record 10.6 percent in October.
The Bank tries to keep inflation at 2 percent so it’s currently way off target.
How this contributed to the crisis
The unpleasant side effect is that with rising borrowing costs (because of higher interest rates), the value of bonds that banks hold usually fall. This gives investors a bad case of the jitters. After the collapse in March of lenders like Silicon Valley Bank and Credit Suisse ― though their problems seemed unconnected ― it was this that prompted concerns they might not be the only institutions with troubles, and fueled contagion fears around the globe.
But Lagarde plowed on regardless
The ECB remained unfazed in the face of emerging banking troubles: It delivered a previously signaled 0.5 percentage-point rate increase in March, less than a week after SVB failed and at a time when Swiss banking giant Credit Suisse was teetering.
Following that decision, ECB President Christine Lagarde stressed that she sees no trade-off between ensuring price stability and financial stability.
In fact, she said the Bank could continue to lift rates while addressing banking troubles with other tools.
The case against
Many economists disagree with Lagarde that the battle for price stability can be pursued without risking financial stability.
The ECB delivered 0.5 percentage-point rate increase in March, less than a week after SVB failed | Patrick T. Fallon/AFP via Getty Images
Claiming so “should be a career-ending statement,” said Stefan Gerlach, chief economist at EFG Bank in Zurich and a former deputy governor of the Central Bank of Ireland. “This is the idea of the ‘separation principle’ of 2008 revisited. That wasn’t a good idea then, and isn’t now either,” he added.
What’s the separation principle?
In 2008, at the start of the financial crisis, as well as in 2011, when the sovereign debt crisis hit, the ECB adhered to the idea that interest rates could be used to ensure price stability at the same time as other measures, such as generous liquidity injections, could ease market tension.
But this just added to the problems and had to be unwound quickly.
This time around, the Portuguese member on the ECB Governing Council, whose country suffered particularly under the consequences of the sovereign debt crisis, is less blasé than Lagarde.
“Our history tells us that we had to backtrack a couple of times already during processes of tightening given threats to financial stability. We cannot risk that this time,” Mario Centeno told POLITICO in an interview.
The case for Lagarde
After the initial fears that troubles could spread across the eurozone, investor nerves have calmed and bank shares started to recover. At the same time, new data showed that underlying inflation pressures kept rising, suggesting that Lagarde and her colleagues were right to stick to their guns ― at least for now.
If that’s the case, March’s interest rate rise ― what Commerzbank economist Jörg Krämer described as “necessary” investment in the central bank’s credibility ― will have paid off.
Market turmoil actually helps
The nervous markets could help the ECB to reach its inflation target without having to raise interest rates as aggressively as previously thought.
Banks tend to slap an additional risk premium on their lending rates which raises the cost of borrowing money for consumers and business. So banks end up doing part of the tightening job for the central bank.
ECB Vice President Luis de Guindos suggested as much in an interview released last month, though he cautioned that it was too early to assess how much impact exactly it may have.
What’s the endgame?
The challenge for the ECB is to strike the right balance. If it doesn’t it risks either the repeat of 2008-style financial troubles or a return to the stagflationary period (low growth on top of high inflation) that roiled the Continent in the 1970s.
If it raises rates too aggressively, bank failures followed by a recession risks forcing the ECB into an interest rate U-turn for the third time, creating massive credibility risks. Conversely, if they don’t hike enough, the central bank may lose a grip on inflation, which is its main mandate.
The only way Lagarde can win is to deliver both price stability and financial stability. In that sense, there is no trade-off ― one without the other just won’t be enough.

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( With inputs from : www.politico.eu )

April 4, 2023
IMF’s Georgieva: ‘Risks to financial stability have increased’

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The outlook for the global economy is likely to remain weak in the medium term amid heightened risks to financial stability, according to International Monetary Fund Managing Director Kristalina Georgieva.
“We expect 2023 to be another challenging year, with global growth slowing to below 3 percent as scarring from the pandemic, the war in Ukraine, and monetary tightening weigh on economic activity,” Georgieva said on Sunday at a conference in China. “Even with a better outlook for 2024, global growth will remain well below its historic average of 3.8 percent,” she said.
“It is also clear that risks to financial stability have increased,” Georgieva said. “At a time of higher debt levels, the rapid transition from a prolonged period of low-interest rates to much higher rates — necessary to fight inflation — inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies.”
Policymakers have acted decisively in response to threats to financial stability, helping ease market stress to some extent, she said. But “uncertainty is high, which underscores the need for vigilance,” she added.
Georgieva also warned about risks of geo-economic fragmentation, which she said “could mean a world split into rival economic blocs — a ‘dangerous division’ that would leave everyone poorer and less secure. Together, these factors mean that the outlook for the global economy over the medium term is likely to remain weak,” she said.
Georgieva spoke during the second day of the China Development Forum in Beijing. The three-day annual event is a social mixer of politics and business, bringing together members of the Chinese Politburo with dozens of CEOs from Western companies like Siemens, Mercedes-Benz and Allianz.
“Fortunately, the news on the world economy is not all bad. We can see some ‘green shoots,’ including in China,” Georgieva said, adding that Beijing is set to account for around a third of the global growth this year.

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( With inputs from : www.politico.eu )

March 23, 2023
UBS buys Credit Suisse in rush deal

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FRANKFURT — Swiss banking giant UBS will buy the country’s second-largest bank Credit Suisse in a deal that will come as a relief to financial markets in Europe and across the world.
UBS said in a statement that the total price is 3 billion Swiss francs, or about $3.25 billion, in UBS shares.
The deal was pushed through in an effort to avoid further turmoil in global banking following the failure of Silicon Valley Bank and another regional lender in the U.S.
“With the takeover of Credit Suisse by UBS, a solution has been found to secure financial stability and protect the Swiss economy in this exceptional situation,” the Swiss National Bank said in a separate statement, noting that the deal was made possible with the support of the Swiss federal government, the Swiss Financial Market Supervisory Authority FINMA and the Swiss National Bank.
The central bank added that UBS and Credit Suisse can obtain a liquidity assistance loan of up to 100 billion francs.
Highlighting the urgency of securing a deal for the bank before markets open on Monday, Swiss authorities adjusted laws to allow further provision of liquidity by the Swiss central bank, while the government agreed to provide additional guarantees.
The expeditious rescue of Credit Suisse was welcomed by the European Central Bank as well as the Federal Reserve in the U.S.
The “swift action” by the Swiss authorities “are instrumental for restoring orderly market conditions and ensuring financial stability,” ECB President Christine Lagarde said in a statement.

The 167-year-old Credit Suisse has been involved in a series of scandals that have undermined the confidence of investors and clients. It has thus found itself in the eye of the storm when the collapse of Silicon Valley Bank sparked fears of a banking crisis.

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( With inputs from : www.politico.eu )

March 15, 2023
The crypto ‘contagion’ that helped bring down SVB

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As U.S. banking regulators begin their post-mortem of Silicon Valley Bank, some pundits are pointing the finger at crypto markets, whose own collapse over the past year left the tech-focused lender hopelessly exposed.
The conventional wisdom about crypto is that it’s “self-referential” — a separate universe to conventional finance — and that its inherent volatility can be contained. The emerging “contagion” theory is that there are enough linkages for extreme turmoil to spill over, much as a virus can sometimes jump from one species to another.
That’s what happened here, according to Barney Frank, the former U.S. congressman who wrote sweeping new banking rules after the banking crisis in 2008, and joined the crypto-friendly Signature Bank as a board member in 2015.
“I think, if it hadn’t been for FTX and the extreme nervousness about crypto, that this wouldn’t have happened,” Frank told POLITICO this week. “That wasn’t something that could have been anticipated by regulators.”
FTX, the crypto exchange that collapsed in November amid allegations of massive fraud, capped a year of turmoil in crypto markets, as investors began withdrawing funds from riskier ventures in response to rising interest rates, which in turn exposed the shaky foundations underpinning the industry. The ensuing “crypto winter” saw the value of the industry plummet by two-thirds, from a peak of $3 trillion in 2021.
Policymakers sought to reassure the public that volatility in the crypto market, blighted by scams and charlatans who sought to profit from investors’ fear of missing out, would naturally be contained. With the collapse of SVB, that claim is facing its biggest test yet.
Patient zero
Under the contagion theory, “patient zero” could be traced back to the implosion of TerraUSD, an “algorithmic stablecoin” that relied on financial engineering to keep its value on par with the U.S. dollar. That promise fell short in May last year following a mass sell-off, creating panic among investors who had used the virtual asset as a safe haven to park cash between taking punts on the crypto market. The origin of the crash is still subject to debate but rising interest rates are often cited as one of the main culprits.
TerraUSD’s demise was catastrophic for a major crypto hedge fund called Three Arrows Capital, dubbed 3AC. The money managers had invested $200 million into Luna, a crypto token whose value was used to prop up TerraUSD, which had become the third largest stablecoin on the market. A British Virgin Islands court ordered 3AC to liquidate its assets at the end of June.

The fund’s end created even more problems for the industry. Major crypto lending businesses, such as BlockFi, Celsius Network and Voyager, had lent hundreds of millions of dollars to 3AC to finance its market bets and were now facing massive losses.
Customers who had deposited their digital assets with the industry lender were suddenly locked out of their accounts, prompting FTX — then the third largest crypto exchange — to step in and bail out BlockFi and Voyager. Meanwhile, central banks continued to raise rates.
The contagion seemed under control for a few months until revelations emerged in November that FTX had been using client cash to finance risky bets elsewhere. The exchange folded soon after, as its customers rushed to get their money out of the platform. BlockFi and Voyager, meanwhile, were left stranded.
Outbreak widens
This is the point where the outbreak of risk in the crypto industry might have jumped species into the banking sector.
Silvergate Bank and Signature Bank, two smaller banks that also failed last week, had extensive business with crypto exchanges, including FTX. Silvergate tried to downplay its exposure to FTX but ended up reporting a $1 billion loss over the last three months of 2022 after investors withdrew more than $8 billion in deposits. Signature also did its best to distance itself from FTX, which made up some 0.1 percent of its deposits.
FTX, the crypto exchange that collapsed in November amid allegations of massive fraud, capped a year of turmoil in crypto markets | Leon Neal/Getty Images
SVB had no direct link to FTX, but was not immune to the broader contagion. Its depositors, including tech startups, crypto firms and VCs, started burning their cash reserves to run their businesses after venture capital funding dried up.
“SVB and Silvergate had the same balance sheet structure and risks — massive duration mismatch, lots of uninsured runnable deposits backed by securities not marked to market, and inadequate regulatory capital because unrealized fair value losses excluded,” former Natwest banker and industry expert Frances Coppola told POLITICO.
Eventually, the deposit drain forced SVB to liquidate underwater assets to accommodate its clients, while trying to handle losses on bond portfolios and an outsized bet on interest rates. As word got out, the withdrawals turned into a bank run as frictionless and hype-driven as a crypto bubble.
Zachary Warmbrodt and Izabella Kaminska contributed reporting from Washington and London, respectively.
This article has been updated to correct the value of the crypto industry.

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( With inputs from : www.politico.eu )

March 14, 2023
Silicon Valley Bank collapse sets off scramble in London to shield UK tech sector

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LONDON — The U.K. government was scrambling on Sunday to limit the fallout for the British tech sector from the collapse of Silicon Valley Bank, a big U.S. lender to many startups and technology companies.
The government is treating the potential reverberations as “a high priority” after a run on deposits drove California-based SVB into insolvency, marking the largest bank failure since the global financial crisis, U.K. Chancellor of the Exchequer Jeremy Hunt said in a statement Sunday morning. U.S. Treasury Secretary Janet Yellen and other policymakers were on alert that problems at SVB could spread.
Hunt said the British government is working on a plan to backstop the cashflow needs of companies affected by SVB’s implosion and the halt in trading of its British unit, Silicon Valley Bank UK. The Bank of England announced on Friday that the U.K. unit is set to enter insolvency.

Silicon Valley Bank’s “failure could have a significant impact on the liquidity of the tech ecosystem,” Hunt said.
The government is working “to avoid or minimize damage to some of our most promising companies in the U.K.,” the chancellor said. “We will bring forward immediate plans to ensure the short-term operational and cashflow needs of Silicon Valley Bank UK customers are able to be met.”
Hunt told the BBC Sunday morning that the government would have a plan that deals with the operational cashflow needs of companies “in the next few days.”
Discussions between the governor of the Bank of England, the prime minister and the chancellor were taking place over the weekend, according to the statement.
Speaking on Sky News Sunday morning, Hunt said that Bank of England Governor Andrew Bailey had made it clear that there was “no systemic risk to our financial system.” But Hunt warned that there was a “serious risk” to the technology and life-sciences sectors in the U.K.
Ministers held talks with the tech industry on Saturday after tech executives in an open letter warned Hunt that the SVB collapse posed an “existential threat” to the U.K. tech sector. They called for government intervention.
Britain’s science and technology minister on Saturday pledged to do “everything we can” to limit the repercussions on U.K. tech companies.
Michelle Donelan, who heads the newly created Department for Science, Innovation and Technology, said in a tweet: “We recognize that the tech sector is often not cashflow positive as they grow and I am determined to stand with them as we do everything we can to minimize impact on the sector.”
Chancellor Jeremy Hunt said protecting the U.K. sector from the impacts of SVB’s collapse was a “high priority” | Justin Tallis/AFP via Getty Images
A bank insolvency procedure for Silicon Valley Bank UK would mean eligible depositors would be paid the protected limit of £85,000, or up to £170,000 for joint accounts.
The Bank of England said in its Friday statement that SVB UK “has a limited presence in the U.K. and no critical functions supporting the financial system.”

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( With inputs from : www.politico.eu )

March 9, 2023
UK enters international race to create public digital money

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The U.K. has entered the international race to create a central bank-backed digital currency, with work to start on a “Britcoin.”
The Treasury and Bank of England said last week it is “likely” a digital pound will be needed in future for everyday payments.
“As the world around us and the way we pay for things becomes more digitalized, the case for a digital pound in the future continues to grow,” said Bank of England Governor Andrew Bailey in a statement.

The BoE’s decision to enter the race comes as other central banks, like the ECB and the People’s Bank of China, plow ahead with their own plans for public digital currencies.
A joint consultation, which runs until June 7, paves the way for more detailed work on the exact design and puts the BoE on a similar trajectory to the ECB — which is considering bringing forward a digital euro.
But there are big questions over the use case for these digital banknotes, and how they would work in practice.
The House of Lords described the project last year as a “solution looking for a problem” and some BoE officials, like Andrew Hauser, have previously voiced concerns about the implications for monetary policy.
“A narrow digital currency that largely cannibalized banknote demand, for example, might have little or no impact. By contrast, a broad digital currency with many attractive payments features could materially increase the demand for central bank liabilities,” Hauser said in June last year.
Huw Van Steenis, who advised former BoE governor Mark Carney on his Future of Finance review in 2018, told POLITICO there were still more questions than answers related to the viability of a digital pound.
“Money is too important to be left [just] to central bankers as the big decisions are political and economic, not just technical,” he said, adding that most early pilots, such as those undertaken by the Nigerian and Bahamian central banks, and even that of China itself, were struggling to gain adoption.
Central bankers have been motivated to act on fears that Big Tech challengers could constrain universal public access to digital cash and with it the sovereignty and dominance of public money.
While ordinary people can already make online payments, those are done privately through banks or payments companies. The idea of a central bank digital currency is to create a digital version of cash that would operate as a public good that comes directly from the central bank.
U.K. citizens would be able to stash Britcoins in online wallets, but there would be initial limits to avoid pulling money out of banks | Chris J Ratcliffe/Getty Images
U.K. citizens would be able to stash Britcoins in online wallets, but there would be initial limits to avoid pulling money out of banks — amid fears that could threaten the stability of the financial system.
A digital pound would also not be totally anonymous to avoid fueling money laundering but users would be able to choose their private settings like for online ad-tracking on social media — and the government would not have access to private payment data. The data would, however, be available to police authorities.
Still, a decision on whether to go-ahead with a digital pound won’t take place until the middle of the decade.
Izabella Kaminska contributed reporting.

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( With inputs from : www.politico.eu )

February 8, 2023