EU Regulators Consider Liquidity Risk Following Credit Suisse Crisis

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EU Regulators Consider Liquidity Risk Following Credit Suisse Crisis

Following the crises of confidence at Credit Suisse Group AG and Silicon Valley Bank, regulators gathered at the European Central Bank (ECB) are reportedly considering how to improve banks’ liquidity management. While discussions are still in their early stages, individual regulators sitting on the ECB’s Supervisory Board are said to want a better picture of the share of deposits that lenders can expect to retain during a crisis. The rise of digital banking and social media means that even small changes to the approach to liquidity could have profound effects on how banks steer their businesses. Bank deposits have “become more sensitive to interest rate differences and susceptible to be moved at short notice,” warned the head of the European Banking Authority, Jose Manuel Campa.

One key question for banks is whether they should lure more cash from retail customers rather than relying on a small group of wealthy individuals and corporate clients, where just a few large withdrawals can have a significant impact on the bank. Smaller deposits are also typically insured in full, making them less likely to be withdrawn than the large sums that companies and wealthy families oversee.

Possible options for regulators include overhauling the liquidity coverage ratio, which requires banks to hold more high-quality liquid assets than they would expect to see flow out over 30 days of stress. The underlying math could be tweaked to make more conservative assumptions on whether uninsured deposits will be withdrawn. The Basel Committee on Banking Supervision, which brings together authorities from around the world, has agreed to take stock of the regulatory and supervisory implications stemming from recent events, with a view to learn lessons.

While any changes to global standards tend to be lengthy processes, authorities in individual jurisdictions are expected to take other actions sooner. For example, the Federal Reserve is considering changes to its oversight of midsized banks, with regulators weighing rules that could bring capital and liquidity thresholds closer to strictures that the largest Wall Street firms face. Meanwhile, the ECB is expected to increase its scrutiny of bank funding, notably via feedback on the regular stress tests that banks conduct.

Overall, the rapid movements of funds between institutions and the rise of social media as a means of amplifying the risk of bank runs have made regulators increasingly concerned about liquidity risk. Any changes that are made to global liquidity standards or insurance cover for deposits are likely to be lengthy processes, but individual regulators may take other actions sooner to mitigate the risks.

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