The absence of a full banking union is seen as a gap in the European Union’s institutional framework. If closed, it could help reduce the financial tensions triggered by the failures of Silicon Valley Bank (SVB) and Credit Suisse. This view was shared by the vice president of the European Central Bank, in an event organized by Luis de Guindos at IESE Business School.
De Guindos emphasized that while eurozone banks have endured the recent stress thanks to solid capital and ample liquidity, lingering vulnerabilities persist. He described the current landscape as a source of instability for the European banking sector when unity is lacking, and he warned that without a banking union, the EU’s framework remains incomplete and susceptible to external shocks.
He noted that the consequences of spreading financial turmoil from the United States and Switzerland would be far milder if the union were already in place. Still, the former Spanish economy minister reminded audiences that SVB represents an extreme case, a business model with deposits that are not protected by high levels of insurance. In trying to raise capital, SVB faced distrust in its business model, while at the same time it confronted comparatively high central bank interest rates.
De Guindos pointed to a key lesson: the ease of depositor movement in a digitized banking world where people can open apps and transfer funds in moments. Social networks can spread information—accurate or not—quickly, underscoring the need for a robust, transparent communication framework.
In conclusion, De Guindos stressed that European banks are in a very different position because they are backed by strong capitalization and liquidity. This strength sets them apart from many global peers.
The CET1 ratio, a measure of higher quality capital, stood at 15.3% at the end of 2022, well above minimum requirements. About half of these high-quality liquid assets are protected by central banks as cash or deposits, providing a cushion against shocks.
Nevertheless, higher interest rates may not deliver as much net interest income for banks as initially expected. Tighter financing conditions are likely to dampen credit demand, which can compress profitability in the lending business.
Beyond this, a higher rate environment could amplify vulnerabilities in non-bank financial institutions, given the high degree of interconnectedness with eurozone banks. De Guindos urged strengthening capital buffers in light of recent episodes in other regions that underscore the importance of a sound regulatory framework for all types of banks.
He called for the full, immediate application of Basel III criteria and the completion of the banking union, along with the European Deposit Guarantee Scheme. He also urged deeper integration of capital markets to provide alternative sources of financing for companies and to complement traditional bank credit.
Macroeconomic situation and the digital euro
Regarding the broader economy, De Guindos argued that core inflation remains stubbornly high and resists falling, even as overall inflation is expected to ease. Economic growth is projected to pick up moderately, with family and business solvency benefiting from this more favorable, though still cautious, outlook.
The ECB will continue its balance sheet normalization and, starting this year, will proceed with the gradual removal of reinvestments from the portfolio previously built through asset purchases.
De Guindos reaffirmed that physical money will not disappear and that the digital euro remains a work in progress. He explained that digital transactions using a digital euro would differ in that the euro would continue to be a liability on the central bank’s balance sheet, ensuring its integrity and stability.