European bank´s Resilience to new interest rate cycle
Luis de Guindos, Vice-President of the European Central Bank (ECB) and Andrea Enria, Chair of the Supervisory Board of the ECB released an article jointly, on the results of the recent ECB´s assessment of European Banks’s resilience in the new phase of monetary policy normalization and the impact of interest rate raises on bank’s balance sheets, profitability, and ability to provide credit to households, small businesses and corporates.
Main takeaways:
- ECB´s assessment under different macroeconomic scenarios shows that the banking sector is sound enough to handle the effects of rising rates on their balance sheets.
- Banks must prepare for potential longer-term effects related to monetary policy normalisation:
- They should pay special attention to interest rate risk in their asset and liability management. The assessment shows how banks’ monitoring of this risk have deficiencies that can be translated into potential incorrect attribution of risks impacting the P&L.
- Profitability would increase overall, driven by net interest income but interest rates raise have a negative impact on the economic value of equity in the medium term.
- Provisions would also increase, reflecting potential difficulties for the most fragile households and firms in coping with the increase in their debt servicing cost.
- Results for the overall impact on solvency remain on average fairly muted with great heterogeneity across banks. Only a few banks, representing 0.1% of the sector’s assets, might react to solvency negative impacts by deleveraging their balance sheet and retracting their support to the economy.
- They should pay special attention to interest rate risk in their asset and liability management. The assessment shows how banks’ monitoring of this risk have deficiencies that can be translated into potential incorrect attribution of risks impacting the P&L.
Filter results
According to a recent report released by CEPS, European financial regulators should adopt competitiveness as a formal secondary objective, following the precedent established by the UK's Financial Services and Markets Act 2023.
According to the OECD. SMEs and start-ups that grow rapidly contribute significantly to job creation, economic growth and competitiveness. Indeed, SMEs that grow by one-third over a three-year period, contribute about as much to job creation as large firms.
According to @McKinsey, banks must prepare for a new growth curve. Strategic precision —the ability to combine technology, capital discipline, and deep customer insight— will distinguish the leaders from the laggards.
According to Kristalina Georgeva IMF Managing Director, lifting growth requires three things: one, regulatory housecleaning to unleash private enterprise; two, deeper regional integration; and three, preparedness to harness AI.
According to The European House – Ambrosetti, the European Union has an opportunity to boost competitiveness and growth by simplifying regulatory and supervisory frameworks, particularly in the areas of sustainability and the financial sector.
According to Ramón Casilda Béjar, Spain, in today’s complex geopolitical landscape, has the opportunity to strengthen its role as a bridge and connecting country between Ibero-America and the European Union, revitalizing investment flows in both directions.
According to @ECB, in moments of acute stress, the public often turns to physical currency as a reliable store of value and a resilient means of payment, underscoring the crucial role it plays above and beyond everyday transactional convenience
According to Juan S. Mora-Sanguinetti, in Spain a 10% increase in regulatory volume leads to a 0.5% drop in employment in companies with fewer than 10 employees.
According to Hélène Rey “In a world where stablecoins, particularly those pegged to the dollar, become an important global payment tool, we must brace ourselves for substantial consequences”.
@judith_arnal proposes reforms for the EU to advance regulatory simplification, starting with consensus on its meaning, with competitiveness as a pillar, plus coordination mechanisms and a governance rethink.
According to @iee_org, Spain has one of the most demanding tax environments for businesses within the European and international context, which may have significant implications for competitiveness, foreign investment attraction, and business expansion.
According to Christine Lagarde for the euro to gain in status, Europe must take decisive steps by completing the single market, reducing regulatory burdens and building a robust capital markets union.