Debate: Failure of the Silicon Valley Bank and the implications for financial stability in Europe
Date: WEDNESDAY, 15 MARCH 2023
Speaker: Mairead McGuinness
Language: EN

We are monitoring the situation in the US carefully. The direct impact on the European Union seems to be limited, but we should reflect on whether there are lessons to be learned for the European Union’s banking sector. Let me start first by giving a brief overview of recent events. Over the last few days, we saw three US banks fail. They are Silicon Valley Bank, Signature Bank and Silvergate Bank. US authorities took swift and decisive action based on their extensive resolution experience. There was strong cooperation between the different authorities involved: the resolution authority, the Federal Deposit Insurance Corporation; the supervisor, the Federal Reserve; and the US Treasury, providing a backstop. The failures of these banks show shortcomings in the management of their balance sheets. This became apparent when the downturn in crypto and the tech sector led startups to withdraw their deposits. In particular, it seems that the biggest of the three banks, Silicon Valley, received a large inflow of corporate deposits during and after COVID. They invested a significant part of these deposits in long-term fixed-rate assets. But they were then faced with an outflow of deposits so had to sell these long-term assets at a significant loss as interest rates had risen. This loss in turn triggered more outflows of deposits. The bank was unable to raise capital on the market and the US resolution authorities had to step in. Let me turn now to the impact on the European Union. Silicon Valley Bank has a very limited presence in the European Union and we’re in touch with the relevant supervisory authorities. So the direct impact of these bank failures on the EU seems to be limited. Silicon Valley Bank’s German branch had lending, where BaFin has already issued a moratorium, but no deposits. In Denmark and Sweden, Silicon Valley Bank was present with representative offices but had no operating branch gathering deposits. Of course, we are monitoring developments with EU supervisors, and that includes the reaction on the markets, which was initially negative on the EU banking sector but has since calmed down. It is the role of competent authorities, under the coordination of the EBA if necessary, to form a view of the possible exposure of businesses and particularly the technology sector. The situation around Silicon Valley Bank is still unfolding and there are many particularities about it. There are no immediate parallels with EU banks. But, more broadly, this situation shows how the economic and financial situation is changing globally and in Europe. The shift in interest rates has created a new environment. The EU financial system and banks in particular are adjusting under close supervision. We have to stay alert to this new environment. Higher inflation and rising interest rates present different challenges to financial stability than ‘low-for-long’ interest rates. The problem of unrealised losses on the bond portfolio of Silicon Valley Bank is an illustration of that. However, the possible difficulties this environment may create for banks’ balance sheets are not new. So, we can say that the EU banking sector is in overall good shape. It has built up its resilience in recent years and it is supervised closely by national and European authorities. But I think at this very early stage we can start to look at some of the lessons that these failures in the US have for the European Union. These US banks were not subject to strict regulatory requirements for liquidity because the United States does not apply Basel to mid-sized and smaller banks, while here in the European Union we do apply the Basel prudential standards to all banks. Had this been the case in the US and the Basel requirements on liquidity applied, it is likely these US banks would have had a stronger liquidity position. The net stable funding ratio in particular makes it much harder for banks to finance long-dated illiquid assets with a volatile deposit base prone to fast withdrawals. I repeat that here in the European Union, the Basel prudential standards are applied to all banks. This introduces an important layer of caution into the prudential regulation and supervision of the EU banking sector, and that includes liquidity risks, interest rate risk and the need to cover unrealised losses on bond portfolios with capital. Supervisors have paid particular attention to interest rate risk in recent years. EU supervisory authorities are closely monitoring recent changes in interest rate risk and liquidity conditions, including possible contagion risks at the level of banks and the system level. Finally, prudential and accounting rules require EU banks to cover, with capital, unrealised losses on their bond portfolios in a timely manner. A second question is to understand under what conditions Silicon Valley Bank expanded abroad. The bank was subject to lighter rules in the United States. Basel standards should apply on internationally active banks. This shows how important our discussions are in the banking package trilogues, in particular for rules relating to third country branches. These cases we’re discussing today also illustrate the importance of a strong and operational crisis management framework that includes the appropriate tools for dealing with all banks in trouble. Like any bank failures, these cases are distinct, but we can see the importance of a robust crisis management and deposit insurance framework. Such a framework allows the failure of banks to be handled in an orderly and timely manner, regardless of their size or business model. One interesting aspect is that the case of Silicon Valley Bank concerns a US mid-sized bank, which by EU standards would in fact be considered a big bank. The US authorities decided to extend their guarantee to uninsured deposits to avoid repercussions on financial stability and the regional economy. They acted to prevent additional volatility in light of the simultaneous failures of smaller banks. All of this confirms that we need an effective crisis management toolbox for the banking sector to protect depositor confidence, financial stability and taxpayers. So, I want to close by reiterating the following. We are watching events in the United States where authorities did take swift and resolute action. The direct impact on the European Union seems limited, and we are in touch with the relevant supervisory authorities. We are also considering what these failures can teach us in terms of prudential regulation, supervision and bank crisis management and deposit insurance. So, I look forward to today’s debate and I thank the Parliament for their flexibility in facilitating a very timely debate on a really important topic.