The collapse of the Silicon Valley Bank appears to be having a “limited” impact on the European Union but authorities should “stay alert” to the dramatic saga unfolding in international markets, said Mairead McGuinness, the European Commissioner for financial services.
“We’re monitoring the situation in the US carefully,” McGuinness told the European Parliament on Wednesday.
“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.”
McGuinness, however, warned of the dangers posed by stubbornly high inflation, which has led central banks around the world to hike interest rates at an unusually aggressive pace.
“We have to stay alert to this new environment. Higher inflation and rising interest rates present different challenges to financial stability,” McGuinness said.
“The problem of unrealised losses on the bond portfolio of Silicon Valley Bank is an illustration of that.”
Her comments come as shares of European banks were rocked by turmoil, plunging as much as 10% on Wednesday, a reflection of growing anxiety among investors following the collapse of two mid-size American banks, Silicon Valley Bank and Signature Bank, over the weekend.
Société Générale and BNP Paribas in France, Deutsche Bank in Germany and Barclays in the United Kingdom were all affected but Credit Suisse was the worst hit by the market turbulence, with its shares plummeting to record lows during trading.
The bank’s auditor, PwC, said on Tuesday it had identified “material weaknesses” in internal controls, an assessment that prompted Saudi National Bank, the Swiss bank’s largest shareholder, to rule out additional financial help to the beleaguered entity.
“The answer is absolutely not,” Ammar Abdul Wahed Al Khudairy, the chairman of Saudi National Bank, told Bloomberg TV.
“We now own 9.8% of the bank. If we go above 10%, all kinds of new rules kick in, whether it be by our regulator, or the European regulator or the Swiss regulator, and we’re not inclined to get into a new regulatory regime.”
The words had an immediate effect on the shares of Credit Suisse, which is Switzerland’s second-largest bank, and triggered a contagion effect on other European banks.
Commissioner McGuinness sought to reassure citizens during her address to MEPs in Strasbourg by declaring the EU’s banking system was “overall in good shape” after building up resilience since the 2008 financial meltdown.
While praising US authorities for taking “swift and decisive” action to manage the SVB collapse, McGuinness made a point to distinguish legislative strength across the Atlantic, saying American banks were subject to “lighter” liquidity rules compared to their European counterparts.
She also noted that an entity like Silicon Valley Bank, which at the end of 2022 had more than $200 billion in assets, would have been considered a “big bank” under EU standards.
“SiliconValley Bank has a very limited presence in the European Union and we’re in touch with the relevant supervisory authorities,” McGuinness said, referring to Germany, Denmark and Sweden.
“The situation is still unfolding and there are many peculiarities about it,” she noted. “There are no immediate parallels with EU banks.”
McGuinness urged lawmakers to draw lessons from this week’s events and put them in the context of broader changes happening in the financial sector as a result of Russia’s invasion of Ukraine, the energy crisis, soaring inflation and higher interest rates.
“All of this confirms that we need an effective crisis-management toolbox for the banking sector to protect depositors’ confidence, financial stability and taxpayers,” the Commissioner said.
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