In an interview with Milano Finanza, Andrea Enria, chair of the Supervisory Board of the European Central Bank (ECB) discussed lessons learned from the Silicon Valley Bank (SVB) and Credit Suisse crises, as well as the best ways to manage liquidity risks.
Question: What steps will you take in [the management of liquidity risk]?
Enria: It will be useful to review the frequency of supervisory reporting, as the [European Banking Authority] recommended in a recent report. Following this suggestion, [the ECB] decided to send banks, starting in September, a request for information on a weekly basis, in order to have more recent data to allow us to better monitor liquidity developments. It’s a question of sending, with greater frequency, the information on liquidity that banks already send us on a monthly basis, which includes maturities, types of counterparties, collateral and refinancing operations with the central bank. This will be useful for observing developments in the most liquid assets and liabilities, like deposits. While waiting for the EBA to modify the regulatory reporting requirements, we will also request a quicker and regular submission of these data, which banks already have to make available immediately on request.
Question: Isn’t it dangerous to mark to market government bonds included in the LCR liquidity indicator? The EU is going against the Basel III regulations.
Enria: Indeed, legislators don’t seem inclined to follow the recommendations I’ve given on this subject. I understand that there’s the issue of volatility that it could cause on banks’ balance sheets. That said, the problem can always emerge, as seen in the case of SVB, which chose not to apply market valuations to government bonds held in the available-for-sale bonds portfolio. When there was a significant interest rate shock, SVB had a significant amount of losses and then it failed. Therefore, it would make sense to hold at market value, as a minimum, bonds that are calculated in the liquidity buffers. Indeed, the LCR serves to allow banks to address sudden liquidity needs by selling bonds on the market. If these bonds are not held at amortised cost, there’s a clear tension between the objective of the supervisory requirement and the accountancy classification.