EU banks to undergo liquidity checks in 2024 following the 2023 crises.
EU banks to undergo liquidity checks in 2024 following the 2023 crises.
European Union Banks Face Scrutiny Over Crisis Preparedness
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The European Union (EU) banking industry will undergo intense scrutiny next year as it prepares for a major crisis without relying on central bank assistance. The European Banking Authority (EBA) has announced its plans to check whether national regulators are testing the assumptions and strategies of banks in finding liquidity after a collapse. This move comes in response to the Swiss central bank stepping in with a liquidity backstop for Credit Suisse in March, just before it was acquired by UBS. The need for credible options to ensure financial stability has become increasingly apparent in the wake of recent crisis events around the world.
The EBA’s focus on liquidity comes as no surprise, given the rapid evaporation of liquidity witnessed during financial crises. The collapse of Silicon Valley Bank in the United States further highlighted the importance of liquidity management for banks. Consequently, global banking regulators have already started examining liquidity requirements for banks on a day-to-day basis.
Liquidity refers to the availability of cash or short-term debt with ready buyers, which allows banks to sustain their day-to-day operations without having to sell assets. To ensure that banks have adequate liquidity provisions in times of crisis, the EBA intends to assess the effectiveness of resolution rules implemented after the global financial crisis. Resolution mechanisms aim to prevent the need for taxpayer bailouts by enabling banks to close down smoothly, transfer key activities to solvent lenders, or restructure their operations to tap into markets or alternative sources of liquidity.
However, the EBA’s first report on resolution rules highlights the limited strategies and actions suggested by institutions to support liquidity in resolution. According to the report, most banks primarily rely on accessing central bank facilities to address liquidity concerns. While this option offers a temporary solution, stressed banks may find it difficult to obtain liquidity from private markets. Moreover, even securing central bank liquidity can be challenging due to collateral requirements.
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Despite these challenges, there are alternative options for banks to address liquidity concerns during a crisis. These options include disposing of assets, issuing debt, or drawing on guaranteed lines of credit. However, evaluating the feasibility and effectiveness of these alternatives remains crucial.
It is important for banks, regulators, and policymakers to recognize the significance of effective liquidity management in times of crisis. By proactively testing assumptions, exploring alternative sources of liquidity, and addressing collateral requirements, banks can enhance their crisis preparedness and minimize the risks of relying solely on central bank assistance. The upcoming scrutiny by the EBA provides an opportunity for the EU banking industry to strengthen its resilience and ensure financial stability in the face of potential crises.
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