March 2. 2024. 2:23

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Bank crisis: ECB’s Lagarde wants complete application of Basel III


The EU banking sector “remained strong” amid market turmoil in the US, President of the European Central Bank (ECB) Christine Lagarde confirmed on Monday (20 March), adding that she wants to see the “complete application” of Basel III bank capital requirements.

Lagarde told lawmakers at her quarterly Monetary Dialogue with the European Parliament on Monday that liquidity ratios – which look at the amount of free cash a bank holds to repay short-term debt – are particularly robust. They are “way above minimum requirements,” she said.

Lagarde also presides over the European Systemic Risk Board (ESRB), an integral part of the ECB, tasked with the oversight of the EU financial system and systemic risks to EU markets’ financial stability.

The past 10 days have been turbulent for EU and US markets. A number of mid-size US banks failing as a result of a downturn in the US crypto and tech sectors, followed by liquidity traps as they ran out of cash to pay back deposits from corporate clients, triggered panic across the Atlantic.

Credit Suisse, a major Swiss bank critical to the bloc’s financial stability, appeared set to crumble over the past few days as customers started withdrawing large sums of money.

The bank was eventually bought out by historic rival UBS on Sunday – a vital move to prevent economic turmoil from spreading throughout the country and beyond, the Swiss government said.

Lagarde made clear EU banks only had “very limited exposure” to Credit Suisse: “we’re talking millions, not billions”.

UBS announces Credit Suisse buyout to calm markets

UBS is set to take over its troubled Swiss rival Credit Suisse for $3.25 billion following weekend crunch talks aimed at preventing a wider international banking crisis, but Asian equities sank Monday (20 March) on lingering worries about the sector.

Only 14 US banks under Basel III scope

The ECB president reiterated that EU market stability faced limited risks from these joint crises – a message the Commission’s financial regulation chief Mairead McGuinness also underlined in a plenary debate last Wednesday.

However, Lagarde also emphasised “the need to remain vigilant about vulnerabilities in a challenging macro-financial environment”.

As for the specific reasons why US banks came to fail, she blamed the country’s partial application of Basel III requirements. Regulatory requirements over liquidity buffers were lifted from small and mid-size banks under the Trump administration – such that regulators could not anticipate the banks’ liquidity positions in time to avoid a failure.

Basel III requirements are a set of internationally-agreed standards that, in a nutshell, seek to determine the minimum level of capital a bank must retain to deal with unexpected losses.

As a result of this partial application, “only 14 banks – yes, 14 banks” were subject to the entirety of the Basel III standards, Lagarde said. The number stands at 2,200 for the EU, according to the ECB’s own analysis.

From an ESRB perspective, she added, “complete application of Basel III is highly recommended, recommendable, and commendable”.

SVB collapse has ‘limited’ impact on EU banks, Commission says

The collapse of Silicon Valley Bank (SVB) in the US only has a “limited impact” on EU markets, and the EU banking sector remains “in good shape”, financial services Commissioner Mairead McGuinness told lawmakers on Wednesday.

Banking package needs reviewing

A Banking package, which looks to add further regulations to ensure banks’ stability, in line with Basel III recommendations, is currently making its way through EU institutions.

In an interview with EURACTIV, the rapporteur of the Banking package, Jonás Fernández, said this crisis should “encourage co-legislators to review how we all think about banking regulation”, and implement Basel III in its entirety as quickly as possible.

This would mean reviewing both the position of the European Parliament and of EU member states, as both introduced derogations from the Basel III provisions and effectively lowering capital requirements from banks compared to the internationally agreed principles.

In an ECB blog post published in November 2022, three high-level ECB officials including Andrea Enria, Chair of the Supervisory Board of the ECB, had warned that the parliamentary negotiations over the Banking Package would “deviate from international standards”.

Instead, the regulators had called for a full application of Basel III, which sets out “rules [that] have been carefully articulated to ensure a worldwide minimum safety net against the plethora of risks that we painfully experienced during the global financial crisis”.

Currently, the banking package is in the final ‘trilogue’ negotiations between the member states, the Parliament and the European Commission.

Enria is scheduled to attend a parliamentary hearing on Tuesday (21 March) specifically on EU repercussions of the SVB collapse.

SVB collapse: Time to ‘rethink’ banking package, says file rapporteur

The collapse of Silicon Valley Bank (SVB) and the market turmoil of the past week must push EU policymakers to rethink their approach to banking regulation and keep regulatory standards high, MEP Jonás Fernández told EURACTIV.