ECB tightens liquidity requirements for banks

Business Banking Insight

Following the collapses of US banks and the banking turbulence in Switzerland, the ECB plans to introduce stricter liquidity requirements for banks.

Bloomberg reports that the European Central Bank (ECB) is intensifying its review of banks’ liquidity reserves.

The background is the bank collapses in the US and Credit Suisse’s near-collapse in Switzerland before UBS, with the support of the government, was forced to rescue its competitor in a forced and hasty deal.

“ECB’s annual review of the risks faced by banks is likely to pay more attention to the management of liquid assets, including the potential for a higher hurdle for key metrics such as the liquidity coverage ratio,” Bloomberg writes, citing informed sources.

ECB may categorize banks by vulnerability

Already at the end of 2021, banks were under scrutiny from the ECB, but after the bank crashes, the review has gained greater intensity.

The article states that European banks’ liquidity exceeds pre-pandemic levels, but that does not prevent the ECB from conducting a thorough review, even though this type of review is conducted every year.

“Later this year, officials will categorize banks into different groups depending on how vulnerable their business models are to funding outflows,” the news agency reports, citing its sources.

Panic withdrawals by wealthy clients can jeopardize a bank

During the bank assessment, the focus is expected to be on wealthy clients.

The reason is that large withdrawals from these affluent clients can quickly deplete a bank’s liquidity reserves. Banks that do not have an equivalent liquidity buffer as their competitors in the sector risk receiving lower ratings when it comes to risk management.

Andrea Enria, the ECB’s top supervisor, stated in a statement this week, cited by Bloomberg, that the ECB has “identified a need to focus on the sustainability of banks’ funding plans.”