EU leaders play down bank risks as economy weakens

European Union leaders Friday played down the risk of a banking crisis developing from recent global financial turbulence and hitting the economy even harder than the energy crunch tied to Russia’s war in Ukraine.

After a meeting in Brussels, the EU government heads said lenders in Europe are generally in sound health and in a position to weather a combination of rising interest rates and slowing economic growth.

“The banking system is stable in Europe,” German Chancellor Olaf Scholz told reporters after the summit. Dutch Prime Minister Mark Rutte said: “Generally, I think we are in good shape.”

The EU deliberations came in the wake of US regulators’ shutdown of two US banks, including Silicon Valley Bank, and a Swiss-orchestrated takeover of troubled lender Credit Suisse by rival UBS.

The emergency actions on both sides of the Atlantic revived memories of the 2008 global financial meltdown and the ensuing EU sovereign debt crisis, which almost broke apart the euro currency now shared by 20 European countries.

In a sign of market jitters in Europe, shares of Deutsche Bank, Germany’s largest lender, fell as much as 14% in Frankfurt on Friday. The drop, which dragged down the stocks of other European lenders, followed a steep rise in the cost of financial derivatives known as credit default swaps that insure bondholders against the bank defaulting on its debts.

Scholz dismissed the idea of basic weaknesses at Deutsche Bank, saying it has become “very profitable” after modernizing its business.

“There is no reason to have any concerns,” he said.

The European economy has been slowing rapidly since Russia invaded Ukraine 13 months ago to the day, leaving the EU flirting with recession. The war has fueled inflation by prompting cuts in supplies of previously abundant Russian oil, natural gas and coal and dented consumer and business confidence.

The European Commission, the EU’s executive arm, expects economic growth in the 27-nation bloc to slow to 0.8% this year from 3.5% in 2022 and 5.4% in 2021. A projected rebound in growth to 1.6% next year depends on a sound banking sector able to lend to businesses and consumers and protect deposits.

The EU has beefed up its regulation of financial institutions since the euro debt crisis and little sign had emerged before Friday of broader contagion in Europe from Credit Suisse’s dramatic rescue.

Nonetheless, financial supervision in Europe remains a patchwork of EU and national authorities pursuing common approaches rather than heeding an actual single European rulebook.

For example, the euro area still lacks a common deposit insurance system, which is widely considered a key defense against future European bank crises. A stalemate among national capitals over how to share risk has left the bloc without this regulatory pillar.

On the market front, officials have said European banks generally have adequate cash buffers – while still urging vigilance. “Our banking sector is resilient, with strong capital and liquidity positions,” the EU leaders said in a joint statement after their meeting.

On his way into it, Paschal Donohoe, head of the group of euro-area finance ministers and Ireland’s public-expenditure minister, echoed the point while saying: “We can never be complacent.”

One reason for prudence is that the European Central Bank has raised interest rates from record lows, denting the balance sheets of lenders and making it more expensive for consumers and businesses to get loans. The ECB is seeking to bring stubbornly high euro-area inflation, which was 8.5% in February, closer to a 2% target.

ECB President Christine Lagarde and Donohoe attended the EU summit to share their views about the economy.

Prime Minister Kyriakos Mitsotakis of Greece, the country that triggered the euro-area debt troubles more than a decade ago, drew a link between the current state of Greek banks and that of European financial institutions as a whole.

“The banking system in Europe is stable and robust,” Mitsotakis said. “I’m absolutely confident about the stability and the robustness of the Greek banks.” [AP]