The European Union’s banking watchdog warned that next year, banks’ strategies for weathering a significant crisis without having to use funds from the central bank will be closely examined.
After the Swiss central bank intervened in March to provide Credit Suisse with a liquidity backstop prior to its acquisition by rival UBS (UBSG.S), the necessity for trustworthy solutions was emphasized.
The European Banking Authority (EBA) said on Thursday that it will begin checking next year whether national regulators are testing the assumptions banks have on finding liquidity after a collapse, particularly in light of the “potential speed of deposit withdrawals, a crucial element that emerged in the context of the recent crisis event in the US and Switzerland”.The rapid evaporation of liquidity was also highlighted by the collapse of Silicon Valley Bank in the United States and has already prompted global banking regulators to review the liquidity requirements for banks on a day-to-day basis.
Liquidity refers to readily available cash or short-term debt with a ready buyer to fund a bank’s day-to-day operations without having to sell assets.
The EBA on Thursday published findings from its first report looking at how regulators across the 27-country EU apply ‘resolution’ rules introduced after the global financial crisis to avoid taxpayer bailouts of banks.
Resolution can mean closing down a bank smoothly and transferring key activities like deposits to a solvent lender, or mounting a recovery by restructuring the bank so that it can tap markets or other sources for liquidity to remain in business.
“Strategies and actions suggested by institutions to support liquidity in resolution remained limited and mostly focused on accessing central bank facilities,” EBA said in its report.
Tapping private markets for liquidity, however, may be difficult for a stressed bank coming out of resolution, and even getting central bank liquidity can be hard without enough collateral, the EBA noted.
Other liquidity options include disposing of assets, issuing debt, or drawing on guaranteed lines of credit.