ECB raises rates while exasperated by US actions
Europe’s financial regulators are furious at the handling of the Silicon Valley Bank collapse, privately accusing US authorities of tearing up a rule book for failed banks that they had helped to write. While the disapproval has yet to be conveyed in a formal setting, some of the region’s top policymakers are seething over the decision to cover all depositors at SVB, fearing it will undermine a globally agreed regime.
One senior eurozone official described their shock to the Financial Times at the “total and utter incompetence” of US authorities, particularly after a decade and a half of “long and boring meetings” with Americans advocating an end to bailouts.
European overseers are notably upset with the US for deviating from its usual practice of insuring just the initial $250,000 of deposits, by using a "systemic risk exception." This comes even as they claim that the California-based financial institution was not significant enough to warrant measures designed to avoid a repeat of the 2008 worldwide financial meltdown.
The 2008 crisis led to a significant shift in the approach to handling bank failures, with policymakers frequently convening at the Bank for International Settlements' Basel headquarters to develop frameworks aimed at reducing the broader impact of such collapses.
The US has a long and messy history of bank collapses – between 1980 and 1994 a bank failed every three days on average. Since the 2010 Dodd-Frank Act introduced several safeguards, the county’s record has been much better, and the frameworks agreed with BIS Basel helped further.
A central aspect of these frameworks involved imposing losses on owners, bondholders, and other unsecured creditors, including depositors with funds exceeding their nation's guarantee limit.
The US strongly advocated for these policies, as per individuals who participated in the discussions. However, unlike EU and UK lenders of comparable size, US banks with balances below $250 billion, such as SVB, are considered too small to adhere to global standards for capital, liquidity, and resolution.
As the Federal Reserve contemplates stricter regulations for mid-sized banks, Congress voted in 2018 to allow it and the Federal Deposit Insurance Corporation (FDIC) to exempt banks under $250 billion from the most stringent rules. A year later, the regulatory agencies introduced a more lenient regime for banks with assets between $50 billion and $250 billion.
The Systemic Risk Council, comprising former high-level regulators, cautioned Fed Chair Jay Powell and former FDIC head Jelena McWilliams against this decision, stating that it was "unclear that all of the affected banking businesses could be resolved in an orderly way."
And the criticism isn’t just from the Europeans – the US Press has already started asking questions, with the NY Times arguing that policymakers, including those in Congress, the Treasury Department, and the Federal Reserve, are obligated to clarify for the American public how matters spiraled so drastically out of control.
Some in the Republican Party have also seized on the Government’s intervention describing it as a ‘woke public bailout’ to pile more pressure on the decision makers.
And to show its commitment to battling inflation, even under the clouds of a potential banking crisis, the European Central Bank (ECB) increased interest rates across the eurozone by 0.5 percentage points, despite concerns that higher borrowing costs could trigger a chain reaction in a banking sector already struggling with a loss of confidence in Switzerland's second-largest lender, Credit Suisse.
ECB officials, responsible for the central bank of the 19-member euro area, stated that inflation is expected to stay high "for too long," compelling them to proceed with their planned series of rate hikes.
The 0.5 percentage point increase raises the bank's primary rate to 3.5%, while the rate on eurozone bank deposits held at the ECB climbs to 3%.
In its February meeting, the ECB had clearly indicated its intention to raise the rate this month; however, financial markets had anticipated a last-minute reversal due to the week's upheaval.
The decision to proceed with inflation control measures came shortly after the Swiss Central Bank provided a 50 billion Swiss francs (£44 billion) loan facility for Credit Suisse. This intervention aimed to alleviate concerns about the financial stability of the bank, which is one of 30 globally deemed too big to fail.