European Central Bank President Jean-Claude Trichet said risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks.
“On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. “The message of the board is that” the link between debt problems and banks “is the most serious threat to financial stability in the European Union.”
Trichet, who chairs the ESRB, made the remarks as European leaders meet in Brussels to discuss how to stave off a default, while preparing a second bailout for the nation. The EU is trying to avoid a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. and resulted in European governments setting aside more than $5 trillion to support banks.
Federal Reserve Chairman Ben S. Bernanke told reporters yesterday that the impact of a possible Greek default on U.S. lenders would be “very small.” With “very few exceptions, the money-market mutual funds don’t have much direct exposure to the three peripheral countries which are currently dealing with debt problems,” he said.
The top U.S. prime money-market funds have about half their assets in securities issued by European banks, Fitch Ratings said in a report on June 21. The Bank for International Settlements estimated European lenders held $136.2 billion in loans to Greece at the end of 2010 and almost $2 trillion in Portugal, Ireland, Spain and Italy.
Greece, Ireland and Portugal all received external support.
BNP Paribas SA, France’s biggest bank, and rivals Societe Generale SA and Credit Agricole SA, may have their credit ratings cut by Moody’s Investors Service because of their investments in Greece, the ratings company said on June 15. German banks could also be at risk from contagion, Fitch said last month.
“The most serious threat to financial stability in the EU stems from the interplay between the vulnerabilities of public finances in certain EU member states and the banking system,” Trichet said. There are “potential contagion effects across the union and beyond.”
Part of a wider regulatory overhaul, the 65-member ESRB aims to identify and warn of brewing risks in the financial system. Trichet and Bank of England Governor Mervyn King, vice- chairman of the board, highlighted risks in areas including asset-price imbalances and exchange-traded funds.
King is also at the center of a regulatory overhaul in the U.K. and will hold a press conference in London tomorrow on Britain’s Financial Policy Committee. He said the ESRB meeting highlighted “the ability of banks to reduce maturity, and where relevant, currency mismatches in their funding structures and to absorb losses arising out of the ongoing credit cycle.”
The Frankfurt-based body can pass on matters to the heads of European governments if its warnings aren’t heeded. While the body will monitor macro-prudential risks, it may turn its attention to single institutions deemed systemically important.
The ESRB is one of four new bodies in Europe’s financial regulation architecture. The others are the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority.
The Basel Committee on Banking Supervision meets in Basel, Switzerland, today to discuss how much extra capital the world’s largest and most systemically important banks will be forced to hold to avert another financial crisis. Global central bank governors are scheduled to meet under the auspices of the BIS in Basel from June 25.
© Copyright 2017 Bloomberg News. All rights reserved.