EBA Tightens Control Over Banks

EBA Tightens Control Over Banks

In a bid to ward off any risks of a financial crisis in the future, the European Central Bank (ECB) is trying to implement tighter scrutiny over banks.

Before banks were obliged to report their liquidity status once a month. As of September, the banks will be required to provide liquidity data weekly, and include in the reports the maturity of liquidity in the bank's accounts, their counterparties, and refinancing transactions.

"We decided to send banks, starting in September, a request for information on a weekly basis, to have more recent data to allow us to better monitor liquidity developments," confirmed Andrea Enria, the ECB supervisory chief to Reuters. “This would help in controlling the development of "the most liquid assets and liabilities, like deposits", she added.

The need for tighter control over liquidity developments came on the heels of the regional banks’ crisis in the United States followed by the collapse of Credit Suisse, which triggered fears of a global financial crisis. Strict measures have also been adopted by the European Union to avert a financial crisis similar to 2008.

In the spring, the European Banking Authority launched the 2023 EU-wide stress testing program, which was designed to help assess the resilience of the European banking sector in the current uncertain and fast-changing macroeconomic environment. The stress testing program covered a larger sample of banks and around 75% of total bank assets in the EU. The adverse stress test scenario was based on a narrative of hypothetical heightened geopolitical tensions, with high inflation and higher interest rates having strong adverse effects on private consumption and investments, both domestically and globally.

According to the DBRS Morning Star, 2023 EBA Stress Test assumptions in the adverse scenario are unique compared to previous EBA Stress Test scenarios, including a sharp GDP decline coupled with high inflation and high-interest rates. The results of the EU-wide stress test are expected to be published on July 28, 2023.

“We believe the singularity of the adverse scenario considered in this stress test could lead to some unexpected results compared to the performance of banks in previous exercises,” notes Pablo Manzano, Vice President, Global FIG at DBRS Morningstar.

The ECB supervisory chief also touched upon the forthcoming results of the bank stress tests in his more optimistic comments to Reuters, “projecting the results to indicate that the banking institutions are equipped to confront potential financial crises, thanks to elevated capital levels and assets that are both solid and reliable”.