The recent collapse of the American bank Silicon Valley Bank (SVB) and the crisis at the Swiss bank Credit Suisse have raised concerns about possible expansion at the level of the international financial sector. Even if European governments and financial institutions are closely monitoring the situation, everything is not so gloomy, reports the media platform European Newsroom, quoted by the Agerpres agency.

On Monday, politicians and European financial leaders took steps to shore up consumer confidence after the crisis at Credit Suisse, Switzerland’s second-largest bank. The emergency takeover of Credit Suisse by rival UBS and difficulties at some regional US banks added to worries about eurozone banks this week.

European consultants have confirmed that in case of bank bankruptcy in the European Union there is a rule according to which shareholders and other creditors will have to bear part of the losses. The bank’s shareholders will bear the losses first. If this is not enough, the losses will have to be borne by the owners of subordinated bonds, the so-called AT1 capital.

In the case of Credit Suisse, AT1 bondholders will lose all their invested money when UBS takes over the bank. Losses on these AT1 bonds amount to 16 billion francs (16 billion euros). Holders of Credit Suisse shares will have to give up a large part of their invested money and will instead receive UBS shares.

The president of the European Central Bank (ECB), Christine Lagarde, remained optimistic that the problems at Credit Suisse will not affect the financial system in the eurozone. According to Lagarde, the European banking sector is resilient thanks to strong capital and liquidity. In the context of the current tensions in the market, the ECB is ready to support the financial system with liquidity, if necessary, and to support the smooth operation of monetary policy, Lagarde added.

Last week, the ECB raised its key interest rate by 50 basis points despite the turbulence. Given the high level of uncertainty at the moment, the central bank is reluctant to make promises about the future. Lagarde emphasized that the guardians of the euro will be guided by economic data.

In Europe, politicians and central bank officials have mixed opinions about the effectiveness of the ECB’s latest monetary policy decisions.

Italy: the monetary rate of the ECB is revised

Italian Economy Minister Giancarlo Giorgetti said on Monday that he believed the impact of the Giancarlo Giorgetti crisis on Italy’s banking system would be “negligible”. Citing the market turmoil surrounding Credit Suisse and, before that, the collapse of Silicon Valley Bank in the US, Giorgetti said he thought the markets had calmed down a bit. “I think that the situation in Europe is under control. We are in constant contact with the regulatory authorities and we are calm for the Italian banking system,” said Giancarlo Giorgetti.

The main index of the Milan Stock Exchange fell 2.6% on Monday morning, while bank shares were affected by a week of turbulence in international financial markets. Credit Suisse’s bailout announcement failed to allay investor concerns. Milan’s stock market closed the session up 2.53% on Tuesday after banking stocks rebounded strongly from recent losses following problems at Silicon Valley Bank and Credit Suisse.

Giorgetti also renewed his vis a vis criticism of the ECB’s policy of raising interest rates to combat high inflation. “This policy needs to be calibrated very carefully because raising interest rates can be good for controlling inflation, but it can also cause problems for financial stability,” Giorgetti said.

The decision of the ECB to increase the reference interest rate by 50 basis points causes dissatisfaction of the Italian government. “The ECB is moving in the wrong direction, even if today was the beginning of the rethinking process. In our opinion, this is not the right way to fight inflation,” said Italian Vice Prime Minister and Minister of Foreign Affairs Antonio Tajani.

France: Basel III rules saved the day

European banks are in an “extremely healthy” situation and their situation is not similar to that of some American banks, Bank of France governor and ECB board member Francois Villeroy de Gaulle said amid concerns about a crisis in the banking sector.

“European banks are not in the same position as some American banks for the very simple reason that they are not subject to the same rules,” added François Villeroi de Galau. Basel III rules, created after the 2008 financial crisis to ensure banks had sufficient capital and liquidity, were “effective”, Villeroy de Galau said. According to him, 400 European banks comply with Basel III rules, compared to only 13 in the US.

Under President Donald Trump, small and medium-sized U.S. banks were exempted from Basel rules in 2019, Villeroy de Galau said, noting that they included both Silicon Valley Bank and Signature Bank, which filed for bankruptcy last week. The head of the Central Bank of France explained that Credit Suisse is a special case. “This is a bank that had both difficulties with its business model and weaknesses with its internal control system,” Villeroy de Galau said.

Even as the ECB announced its willingness to provide liquidity to keep the eurozone’s financial system stable, the ECB continued to raise its key interest rate by half a percentage point to combat inflation, despite fears that rising borrowing costs could put new pressure on banks. Villeroy de Gaulle said the ECB’s decision sends a “strong” signal of confidence in its strategy to fight inflation and the soundness of European and French banks.

Slovenia, Bulgaria and Germany maintain a calm position

On Monday, Slovenia’s central bank announced that the banking systems in Europe and Slovenia are operating stably, unaffected by the turmoil in the US and Swiss banking markets. “The banking sector in the euro area is stable, with strong capital and liquidity,” the Bank of Slovenia added.

According to the assurances of the Bank of Slovenia, the range of instruments in the ECB’s monetary policy arsenal is wide enough to provide liquidity support to the financial system if necessary.

Bulgaria’s Interim Finance Minister Rozita Velkova commented that there is currently no risk of contagion for Bulgaria following the bank failures in the US.

MoitePari.bg financial analyst Desislava Nikolova noted that the ECB’s interest rate hike, which began in 2022, did not affect the Bulgarian banking market due to the high level of liquidity. According to Nikolova, the country has enough resources to slow down the processes related to the increase of interest rates. Since Bulgaria is not part of the euro zone, it has been able to maintain the lowest interest rates for loans and deposits, the analyst estimated. She also said that instead of a gradual increase in interest rates, Bulgaria could experience faster growth due to macroeconomic conditions, with recent developments causing uncertainty.

German Chancellor Olaf Scholz on Monday welcomed the “decisive action taken by the Swiss authorities” on the takeover of Credit Suisse by rival UBS, an executive spokesman said. He emphasized that the European authorities learned a lesson after the 2008 financial crisis and strengthened regulation in the banking sector. “That’s why the German banking system is in a good position,” the spokesman added.

The end of ECB interest rate hikes is not yet in sight

According to German Central Bank (Bundesbank) President Joachim Nagel, who also sits on the ECB’s monetary policy committee, the Frankfurt-based institution has not yet reached the end of its rate hike cycle.

At the same time, in an interview for the Financial Times, Joachim Nagel estimated that interest rates are approaching the limiting level. Economists believe that it is at this level that interest rates begin to slow down economic activity.

Nagel noted that the ECB will have to stand up to those calling for premature rate cuts after the rate hikes have peaked. Otherwise, there is a risk that high inflation will rise again, Nagel said. “Our fight against inflation is not over,” stressed the head of the Central Bank of Germany.