FRANKFURT, Germany (AP) – The European Central Bank carried out a big rate hike on Thursday, brushing aside predictions it could hit back if the U.S. bank collapses and Problems at Credit Suisse are fueling concerns about the impact of higher interest rates on the global banking system.
The ECB hiked interest rates by half a percentage point on Thursday, underscoring its determination to fight high inflation at 8.5%. In a statement, the bank described the banking sector in the 20 countries with the euro currency as “resilient”, with strong finances.
“We are closely monitoring the current market tensions and stand ready to react if needed to maintain price and financial stability,” ECB President Christine Lagarde said at a news conference. He later added, “I think the banking sector is in a much, much stronger position right now than it was in 2008” during the global financial crisis.
The message follows The Silicon Valley Bank in the USA is going under last week after suffering losses on government-backed bonds, which fell in value due to rising interest rates. At that time a globally networked Swiss bank Credit Suisse experienced a price drop this week and had to contact the Swiss central bank for an emergency loan.
Troubles at Credit Suisse dragged shares of strong European lenders including Deutsche Bank, BNP Paribas and Societe General on Wednesday. Bank stocks rallied on Thursday.
Analysts say the stock sell-off was fueled by concerns that banks have taken on additional risk to boost investment returns over the years very low interest rates and some may have failed to protect themselves against these stocks turning sour as interest rates rise.
Lagarde said that “inflation is likely to stay too high for too long” and that further increases will be based on the numbers.
Similar questions are being raised about what the Federal Reserve will do at its interest rate meeting next week.
Fed Chair Jerome Powell said just last week that the final rate level would be “higher than previously expected,” prompting some analysts to predict the Fed would hike rates by half a point after picking up the pace had slowed to a quarter point in February. Since then, expectations have shifted back towards a quarter point.
European finance ministers have said their banking system is not directly exposed Bankruptcies of Silicon Valley Bank and others in the US According to analysts, Europe’s banking system took extensive safety precautions in the wake of the global financial crisis that followed the collapse of US investment bank Lehman Brothers in 2008, leading to €600 billion in tax-financed bailouts of European banks between 2008 and 2012.
The far-reaching post-Lehman banking reforms enacted by the European Union forced banks to hold thicker financial cushions against losses and placed the largest banks under the watchful eye of the ECB, removing them from the national regulators that presumed became that they turned a blind eye to problems that were building up at their local banks.
European banks are also observing international rules that increase the amount of cash they must hold to cover deposits. Smaller US banks were exempt from this rule; Silicon Valley was one of them.
But all that hasn’t stopped the US banking explosion from playing a big role for the ECB, whose chairman said on Thursday that “there is no trade-off between price stability and financial stability”.
Credit Suisse, Switzerland’s second-largest bank, saw its shares plunge as much as 30% on Wednesday after its biggest investor, the Saudi National Bank, said it could not provide any more financial support.
Credit Suisse, whose troubles predated the collapse of Silicon Valley Bank, then turned to the Swiss National Bank for a loan of up to $54 billion to stabilize its finances. send the stock skyrocketing by as much as 30% on Thursday. That pushed broader bank stocks back higher.
Nicolas Veron, banking expert at Brussels-based think tank Bruegel, said European banking supervision is much stronger than it was in 2007, when banks were “dramatically undercapitalized and poorly supervised”. He also said that the ECB has been carefully examining the impact of higher interest rates on its banks.
“Nevertheless, if we had had our conversation a week ago, I would have also expressed my confidence in US banking regulators,” he said, calling the US bank’s collapse evidence of “a pretty one.” inexplicable oversight failure” by the US Federal Reserve.
“And because the Fed has such status, there’s a general sense of doubt about the quality of supervision and whether what we think we know about banks is actually correct,” Veron said.
Silicon Valley Bank failed after suffering losses on government-backed bonds, which fell in value as interest rates rose. The US Federal Reserve and other central banks have hiked interest rates sharply to fight inflation. The collapse of the SVB raised concerns that rapid rate hikes could lead to it other problems in the banking system if banks had similar losses on their balance sheets.
The ECB has been raising interest rates at an unprecedented rate to stem the inflation it is fueling higher energy prices related to Russia’s war in Ukraine. The ECB’s benchmarks affect the cost of borrowing across the economy, making it more expensive to buy things or invest in new production. This cools the demand for goods and reduces the upward pressure on prices.
The ECB’s interest rate on loans to banks was raised to 3.5% and the interest rate it pays on deposits it takes from banks was raised to 3%.
Source : finance.yahoo.com