European banks have been urged to maintain conservative dividends and payouts in the wake of recent turbulence in the banking sector. The chair of the European Banking Authority (EBA), Jose Manuel Campa, said that while banks had strong capital and liquidity buffers, they should focus on keeping their cash reserves topped up. He added that rising interest rates could ultimately impact both the economy and customers of banks, so financial institutions should prepare for conservative scenarios. The EBA oversees the application of EU banking rules and coordinates regular health checks of banks, with the results of the latest stress test due this summer.
Campa also noted the need for EU banks to be prudent in how they price and keep their depositors, given that customers can easily move their money to another bank online. He suggested that banks should pass on rises in interest rates to depositors to avoid potential problems. Campa also raised concerns about the "unrealized" losses in bond portfolios of banks, a factor in the collapse of Silicon Valley Bank. He added that the market for credit default swaps (CDS) was now a "concern" for regulators following the sharp volatility in CDS for Deutsche Bank.
Despite recent turbulence, Campa said there was no evidence that the banking sector required a rethink in banking rules. He suggested that the global consensus was to implement the rules that were approved after the global financial crisis. The EU is due to update its framework for closing failing big banks to include medium-sized lenders, a move that Campa encouraged. However, critics say the takeover of Credit Suisse showed that post-financial crisis rules to end "too big to fail" banks and avoid public help had not worked. Campa acknowledged that resolving a large systemic bank was always going to be difficult, and there was no guarantee of complete comfort.
In conclusion, the recent banking crisis highlights the need for conservative payouts by EU banks and keeping their cash reserves topped up. While banks have strong capital and liquidity buffers, they must prepare for conservative scenarios and be prudent in how they price and keep their depositors. Regulators are concerned about the market for credit default swaps, and the EU is due to update its framework for closing failing big banks to include medium-sized lenders. However, resolving a large systemic bank remains a difficult task. The global consensus is to implement the rules that were approved after the global financial crisis, which have helped rather than hurt the banking sector.
