It is the US, not Europe’s banking system, that is a trigger for concern, say prime economists

A barge on the Rhine near the headquarters of the European Central Bank (ECB) at sunset in the financial district in Frankfurt am Main, Germany,

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Europe has learned the lessons of the financial crisis and is now in a strong position to weather further strains in its banking system, say several economists and policymakers.

A key theme at the Ambrosetti Forum in Italy on Thursday and Friday was the potential for further instability in financial markets due to problems in the banking sector – particularly against the backdrop of tightening financing conditions.

The collapse of US Silicon Valley Bank and several other regional lenders in early March sparked contagion fears, compounded by the emergency bailout of Credit Suisse by Swiss rival UBS.

Policymakers on both sides of the Atlantic have acted decisively and pledged further support if needed. Markets have somewhat recovered this week.

Valerio De Molli, managing partner and CEO of The European House – Ambrosetti, told CNBC on the sidelines of Thursday’s event that “uncertainty and fear” would continue to plague markets this year.

“The more worrying factor is the uncertainty in the banking industry, not so much in Europe – the ECB (European Central Bank) has done incredibly well, so has the European Commission – the eurozone is stable and healthy and profitable, but what could be, especially in the United States is a mystery,” De Molli told CNBC’s Steve Sedgwick.

De Molli indicated that the SVB collapse would likely be “the first in a series” of bank failures. However, he claimed that “lessons learned globally, but particularly in Europe” have allowed the eurozone to shore up the “financial resilience and stability” of its banking system, making a repeat of the 2008 financial crisis “impossible.”

The emphasis on “lessons learned” in Europe was echoed by George Papaconstantinou – professor and dean at the European University Institute and former Greek finance minister – who also expressed his concerns about the US

“We’ve learned that fiscal and monetary policy have to work together, we’ve learned that you have to be ahead of the markets and not five seconds behind, we’ve learned how to react quickly and sometimes you need overwhelming reactions, so all of it is good,” Papaconstantinou told CNBC on Friday.

He added that the developments at SVB and Credit Suisse were due to “mistakes in risk management” and, in the case of SVB, also “political failures in the US”.

In particular, he cited former President Donald Trump’s raising the threshold below which banks must undergo stress tests from $50 billion to $250 billion. This alignment with the post-crisis Dodd-Frank legislation effectively meant that the fallen lender was not subjected to an audit that might have uncovered its problems earlier. The 2018 move was part of a broad rollback of banking rules put in place after the crisis.

Although Papaconstantinou praised the progress made in Europe, he stressed that it was too early to tell if there was a general weakness in the banking system. He noted that there was no room for complacency on the part of policymakers and regulators, many of whom had promised further vigilance.

“We’re in an environment where interest rates are rising and bond prices are falling as a result, so it’s very likely that banks are in a gap because they’ve invested in longer-dated instruments and that’s a problem,” he said he .

“We’re in an environment of rising inflation, so a lot of the loans they’ve made at very low interest rates are problematic for them, so it’s not a very comfortable environment. It’s not an environment where we can sit back and say, ‘okay, that was just two lapses and we can carry on as usual’. Not at all.”

“Two Front War”

Spanish Economy Minister Nadia Calviño said on Friday that banks in Spain have an even stronger solvency and liquidity position than many of their European counterparts.

“We don’t see any signs of stress in the Spanish market, apart from the general volatility that we’re seeing in the financial markets these days,” she said, adding that the situation now is “completely different” from the run-up to the European debt crisis in the year 2012

“We have learned the lessons of the financial crisis, there has been deep restructuring this decade and they are obviously in a stronger position than they have been in the past.”

Unnecessarily, central banks must wage a “war on two fronts” while fighting high inflation and financial sector instability, noted Gene Frieda, executive vice president and global strategist at Pimco.

“Something is happening in the banking sector now that is outside of the Fed’s control and we all have our opinions on how bad this is going to be, but personally I don’t think we are facing a banking crisis, which is going to be a bit Tightening credit conditions will fuel a recession. It’s not the end of the world, but it’s certainly not being priced into the stock market,” Frieda told CNBC on Friday.

“We’re still fighting inflation, but at the same time we’re fighting these uncertainties in the banking sector. All central banks will try to distinguish between the two and say, on the one hand, we can use certain measures to deal with financial instability. On the other hand, we can use interest rates to fight inflation. But those two are getting blurred, and I think financial instability will inevitably play the dominant role.”

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