The European Union (EU) banking sector is gearing up for a more vigilant approach in 2024, as the EU’s banking watchdog, the European Banking Authority (EBA), outlined specific objectives for its annual checks on lenders. This strategic move aims to incorporate vital lessons learned from the global banking turmoil experienced earlier this year.
Let’s look into the key areas that will take center stage in the upcoming sector monitoring.
While the EBA has traditionally guided banking regulators across the EU’s 27 member states, the 2024 directive comes with a fresh perspective. It emphasizes three critical areas of concern:
Liquidity and Funding Risks
Maintaining adequate liquidity and managing funding risks have taken on even greater importance following the events that unfolded earlier this year. The EBA intends to closely scrutinize how EU banks manage their liquidity to ensure they are better equipped to handle unforeseen challenges.
Impact of Higher Interest Rates
The fluctuating interest rates in today’s economic landscape can significantly affect banks’ business models. The EBA will assess how these rate changes impact the profitability and sustainability of financial institutions within the EU.
Resilience in the Face of Shocks
Recent market turbulence, such as the collapse of U.S. lenders and the forced takeover of Credit Suisse by UBS, has underscored the need for banks to remain resilient in the face of economic shocks. Regulators will closely examine how EU banks recover from unexpected events and maintain their stability.
Among the EU regulators, the European Central Bank (ECB) plays a pivotal role as the overseer of the Eurozone’s largest lenders. Its influence will be crucial in implementing the EBA’s new objectives and ensuring that the banking sector remains robust.
The events that transpired earlier in the year, which led to the downfall of several U.S. banks and the takeover of Credit Suisse by UBS, have raised significant questions about the effectiveness of rules and the quality of supervision. The EBA’s new approach is a clear response to these challenges and aims to prevent future financial crises.
The Basel Committee of global banking regulators has also acknowledged the need for stronger supervision. They emphasized that not only boards of banks but also supervisors need to enhance their vigilance, especially in the era of social media. Events like the collapse of Silicon Valley Bank have shown how social media posts can accelerate runs on deposits.
The EBA plans to diligently follow up on its findings by engaging in bilateral discussions with regulators and conducting peer reviews. This approach will ensure that the new objectives are effectively implemented and that the EU banking sector remains resilient in the face of future challenges.
