World Economy

ECB Sets New Rules on Bank Capital, Cash

The new guidelines aim at smoothing out differences among the roughly 120 large eurozone banks it supervises
The European Central Bank headquarters in Frankfurt, GermanyThe European Central Bank headquarters in Frankfurt, Germany

The European Central Bank published new guidelines on Friday defining how eurozone banks should calculate how much capital and cash they must hold for their own safety.

The new guidelines, which will kick in next year, set out "principles" such as the need for banks to run "stress tests" to quantify their robustness in different circumstances, Reuters reported.

Although the proposed guidelines are non-binding, the ECB can threaten banks with higher capital requirements if they fail to comply. The initiative follows the demise of four eurozone banks in the past year, including Spain's Banco Popular that found itself out of cash after a run on its deposits.

"Supervisory experience shows that banks may need to improve the quality of their internal capital and liquidity adequacy assessment processes," the ECB said.

The ECB said the new guidelines aim at smoothing out differences among the roughly 120 large eurozone banks it supervises.

"Banks are expected to assess the risks they face, and in a forward-looking manner ensure that all material risks are identified, effectively managed and covered by adequate capital and liquidity levels at all times," it added.

The ECB will now seek industry feedback on the proposed new rules via a public consultation due to run until May 4.

Big Time Politics

Big time politics from elections to trade wars will overshadow the European Central Bank's policy meeting next week, keeping investors on the edge with markets seen prone to continued volatility after a recent equity rout.

Germany could finally get a government, nearly half a year after elections, but political wrangling in Italy, the eurozone's third biggest economy, is only beginning as polls point to a potentially messy, inconclusive vote on Sunday.

Europe's political turmoil comes at an especially sensitive time, with the US administration appearing to be launching a full-scale trade war after President Donald Trump announced new restrictions and said "trade wars are good and easy to win".

Italy's vote is almost certain to produce a hung parliament, leading to weeks of negotiations. Investors fear this may produce a patchwork coalition that may be prone to instability and could struggle to reconcile diverging views on key political issues, including the country's relationship with the European Union.

"We expect such a government, regardless of whether it is formed only by center-right parties or is a mix of traditional center-left and center-right parties, to remain exposed to risks of a government crisis and/or snap elections during the next legislature," Fabio Fois at Barclays said.

"We think the specter of political instability could cast a long shadow, as a future coalition government may group together several political parties with very different views on critical subjects such as fiscal policy, structural reform implementation and the relationship with European partners and authorities," Fois added.

In Germany, the trials of Chancellor Angela Merkel could finally come to an end when a prospective coalition partner votes on a tie-up that could finally put a government in place.

But a five-month ordeal to form a government is seen having weakened Merkel, even if the deal would produce a pro-European government that could finally push ahead with a key reform agenda for Europe.

Trade, ECB

Europe's political squabbles come as the bloc is enjoying its best economic run in a decade, with growth well above trend and employment at record highs, even if some recent indicators suggest that growth may have peaked.

Still, the political noise could potentially complicate the bloc's response to US trade restrictions, a worry for the continents policymakers since the EU may be the only bloc large enough to orchestrate an effective response.

Trump announced on Thursday he would impose hefty tariffs on imported steel and aluminum to protect US producers, risking retaliation from major trade partners like China, Europe and neighboring Canada.

"Retaliation would probably be concentrated on certain farm products, that would hurt US states with a strong Trump support base," ABN Amro's Arjen van Dijkhuizen said. "We consider a serious rise of protectionism the key risk to our outlook for global trade."

The prospect of a trade war and attempts by some US officials to talk down the dollar will also complicate life for the ECB when it meets on Thursday to discuss how to normalize policy after years of extraordinary stimulus.

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