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ECB upgrades liquidity and funding risks practices and tells EU banks to monitor funds


Brussels, 21 March 2023, Euro Zone banks should remain vigil and keep an eye on their funding, and prepare for all possibilities including further rate increases, said Andrea Enria, The European Central Bank's top banking supervisor.

Andrea Enria, said in a speech earlier today that when the interest rate increases, the economic value of equity falls due, among other factors, to the reduction in rhe value of fixed-income securities, including sovereign debt securities.

He continued, that If not appropriately managed, unrealised losses on securities that banks hold at amortised cost might become a concern, particularly because investors tend to focus on market values when their level of confidence dwindles on the back of changes in fundamentals or even mere rumours.

He explained by saying that the ECB reviewed the interest rate and credit spread risk management practices of the most exposed banks and instructed them to improve the way they monitor and manage the negative impact that rising rates typically have on their economic value of equity. He continued that the interest risk assessment started in the second half of 2021 when the first signs of inflationary pressure emerged, and in 2022 we included those risks in our supervisory priorities.

As part f risk management practices, he said that the ECB asked several banks to be more conservative in the assumptions they apply when stress testing credit spreads on financial securities. And To ensure the accuracy of the models used to reflect loan repayment and deposit withdrawal behaviours by customers. In line with the new interest rate environment, ECB advised banks to improve the calibration, validation and back-testing of their asset and liability management models. Liquidity and funding risks have also been upgraded in our set of supervisory priorities.

He continues, that ECB supervisors began in the second half of last year to devote significant attention to the sustainability of banks’ funding plans. Both euro area banks and ECB supervisors are focusing on the risks and risk management practices that are most relevant, given the fast pace of change in the interest rate environment.
He awarded liquidity resilience to the framework implemented in the aftermath of the global financial crisis and the choice, made by the European Union, to apply the international standards to all the banks operating in its jurisdiction.


He then pointed out the recent events that caused the international financial system to be on edge and market turmoil triggered by Silicon Valley Bank of the United States and Switzerland's giant Credit Suisse (CSGN.S) running out of funds, and spike in credit default swap spreads experienced by Credit Suisse last week.

He clarified that despite prices tumble, the funding and liquidity positions of euro area banks were not materially affected. Enria pointed out the difference between the US banking system and the European system. He said, “the banks we supervise do not exhibit the outlier features of extreme interest rate risk”.

He continued to say, Eurozone banks are subject to LCR the liquidity coverage ratio and NSFR the net stable funding ratio requirements. He pointed out that recent data indicates that banks which experienced slight deposit outflows have succeeded in maintaining their levels of excess liquidity.



Read the full speech here.



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