ECB’s Lagarde insists banks much stronger than in 2008 after raising interest rates despite Credit Suisse turmoil – as it happened

Time to recap.

The European Central Bank has pressed on with its plan to hike borrowing costs, despite the turmoil in the financial system.

The ECB lifted its benchmake rates by half a percent, or 50 basis points, “in line with its determination” to bring inflation down to its 2% target.

The decision surprised some investors, who thought the crisis gripping Credit Suise could have encouraged the ECB to rethink its plans. Three or four policymakers did fail to back the plan, though.

ECB president Christine Lagarde told reporters in Frankfurt that Europe’s banks were much stronger than in the financial crisis 15 years ago, saying:

“I was around in 2008, so I have clear recollection of what happened and what we had to do, we did reform the framework, we did agree on Basel III. We did increase the capital ratio, we did increase the financial coverage ratio as well.

And I think that the banking sector is currently in a much, much stronger position than where it was back in 2008.”

Lagarde also cautioned that “The outlook for economic growth is tilted to the downside”, and that the market tensions could led to tighter credit conditions and hurt confidence.

Shares in Credit Suisse have rebounded today, after it revealed plans to borrow up to 50bn Swiss francs (£44bn) from the Swiss central bank to boost liquidity and calm investors.

Credit Suisse shares are up 19% in late trading, meaning it has recovered much – but not all – of Wednesday’s 24% tumble.

In the US, the biggest banks are reportedly discussing a joint rescue of regional lender First Republic. Its shares are down almost 20% in late trading.

European markets are staging a moderate rebound after heavy losses yesterday. The FTSE 100 is up 72 points, or 1%, at 7415 points, having tumbled 3.8% yesterday.

In other news:

America’s labour market was stronger than expected, as employers continued to hold onto workers.

There were 192,000 new ‘initial claims’ for unemployment support last week, down from 212,00 the previous week, and lower than the 205,000 claims forecast.

Over in the US, shares in regional bank First Republic are down 26% today, despite reports of a potential rescue deal.

The Wall Street Journal says that several banks including JPMorgan Chase & Co and Morgan Stanley are in talks with First Republic Bank for a potential deal.

The deal could involve capital infusion to bolster the troubled lender after the collapse of Silicon Valley Bank last week, which triggered fears of a contagion, the WSJ says.

A full takeover is also a possibility, though less certain, the report added.

The report says:

The biggest banks in the U.S., including JPMorgan Chase & Co., are discussing a joint rescue of First Republic Bank that could include a sizable capital infusion to shore up the beleaguered lender, people familiar with the matter said

JPMorgan is working with Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. to provide a lifeline to First Republic, the people said.

Others involved include Morgan Stanley and Goldman Sachs Group Inc. as well as U.S. Bancorp and PNC Financial Services Group Inc. the people said.

First Republic’s shares had fallen over 30% at the start of trading, before a modest recovery.

The FT have a good story on the banking crisis today.

They report that Europe’s financial regulators are furious with their US counterparts over the handling of the Silicon Valley Bank collapse, and are privately accusing US authorities of tearing up a rule book for failed banks that they had helped to create.

They say:

While the disapproval has yet to be conveyed in a formal setting, some of the region’s top policymakers are seething over the decision to cover all depositors at SVB, fearing it will undermine a globally agreed regime.

One senior eurozone official described their shock at the “total and utter incompetence” of US authorities, particularly after a decade and a half of “long and boring meetings” with Americans advocating an end to bailouts.

Europe’s supervisors are particularly irate at the US decision to break with its own standard of guaranteeing only the first $250,000 of deposits by invoking a “systemic risk exception” — despite claiming the California-based lender was too small to face rules aimed at preventing a rerun of the 2008 global financial crisis.

“This is the US version of the small Venetian banks,” said one French policy expert, referring to the US’s criticism of Europe’s handling of the Monte dei Paschi debacle. “You are always systemic for somebody.”

Interesting… Bloomberg are reporting that ECB vice-president Luis de Guindos told finance ministers on Tuesday that some European Union banks could be vulnerable to financial strain due to rising interest rates.

Bloomberg’s Alberto Nardelli writes:

Elaborating on the state of the financial industry after the collapse of Silicon Valley Bank, Guindos told the regular Ecofin meeting in Brussels that lenders in the region are much less exposed than their US counterparts, according to people familiar with the talks, who declined to be identified discussing private conversations.

All the same, Guindos said that the ECB couldn’t rule out that some lenders might be at risk because of their business models, according to the people. He cautioned not to be complacent and warned that a lack of confidence could trigger contagion.

An ECB spokesman declined to comment on the meeting.

The discussion took place before a collapse in Credit Suisse Group AG’s share price prompted Switzerland’s central bank to offer it liquidity.

Germany’s financial regulator BaFin has said it is looking closely at current market developments and that the German financial system is still stable and robust, Reuters reports.

Christine Lagarde repeats her confidence in the eurozone banking sector, saying it is resilient, with strong capital and liquidity positions.

She says the ECB is “monitoring the particular situation” and the market tensions, and stands ready to respond.

It’s not business as usual, but we believe that the decision that we have taken is robust, completely justified by the circumstances and informed by our current analysis.

Q: Is the turmoil in the banking sector a US-specific problem?

Lagarde points out that the Basel 3 rules apply internationally, although there is argument about who implements them better.

In Europe, we have strong supervision, we have strong capital, and we have solid liquidity positions.

Lagarde adds that exposures to certain sectors are not concentrated in particular banks, so the eurozone does not have a situation similar to that in California.

Luis de Guindos, the ECB’s vice-president, points out that Silicon Valley Bank’s business model “was quite unique”, with a mismatch between the assets and liabilities.

[SVB created a maturity mismatch by buying US government bonds at the peak of the market. Their face value fell as interest rates rose, meaning it faced losses when customers withdrew their funds].

History will judge whether today’s interest rate rise from the European Central Bank is wise, or foolhardy.

But it wouldn’t be the first time that the ECB has blundered by focusing on inflation when a crisis was raging.

In July 2008 it raised rates, only to reverse that move a few months later when Lehman Brothers failed.

At the press conference, Christine Lagarde is asked whether it could be making a similar mistake today.

She replies that the ECB is mindful of its history, but confident that today’s decision is ‘robust’, and what is needed.

Lagarde says:

The banks are in a completely different position from 2008. And, you know, crises are never exactly the same anyway.

She repeats her earlier point that the architecture of the banking system, the framework within which they operate, and the supervision of the banking system have all been considerably improved since 2008.

In July 2011, the ECB also raised rates despite the outbreak of the eurozone debt crisis, as it persisted with fighting inflation.

Lagarde then gets a question about greedflation – a hot topic after it emerged earlier this month that the ECB council has been shown evidence that profit margins had been rising rather than falling.

Q: What contribution are corporate profits making to inflation?

The ECB president replies today’s statement from the ECB points out that “many firms were able to raise their profit margins in sectors faced with constrained supply and resurgent demand”.

Lagarde says the ECB hopes to see a proper burden-sharing of the cost-shock which has hit the eurozone, saying it is effectively a tax.

The tax should be shared. There should be burden-sharing.

Such burden sharing (with firms not whacking up their profit margins) would reduce the risk of rising prices pushing up wages, Lagarde suggests.

Such burden-sharing needs to be debated, she adds.

Q: Will the ECB slow the pace of its rate hikes because of financial stability?

Lagarde insists there is no trade off between price stability and financial stability.

We are demonstrating thistoday, she says, by addressing the price stability issue by raising interest rate by 50 basis points – as intended – because inflation is over target.

We also are monitoring market tensions, Lagarde reports, adding that:

We stand ready to provide any kind of additional facilities needed.

Today’s decision to raise interest rates by 50 basis points was not unanimous, Christine Lagarde, reveals, but it was taken quickly.

The ECB president explaints the executive board proposed today’s decision, and it was adopted by “a very large majority” of the governing council.

But, three or four members that did not support the decision [out of the 26 members of the governing council].

Lagards says these dissenters were keen to probably give a bit more time to see how the situation unfolds, and collect additional data. “Otherwise, it was a very large majority decisionm” she insists.

Christine Lagade insists that the ECB’s determination to fight inflation is intact, and should not be doubted.

She says:

We are not waning on our commitment to fight inflation and we are determined to return inflation back to 2% target in the medium term.

Q: Are we on the verge of a systemic crisis like in 2008?

Lagarde repeats that the ECB’s Governing Council is “monitoring current market tensions closely” and stands ready to respond as necessary to preserve price stability and financial stability.

She reminds reporters that she involved in the 2008 financial crisis [as France’s finance minister], and knows that reforms have been implemented since those dramatic days.

She says policymakers reformed the framework to strengthen the financial system, agreed on the Basel III regulatory framework, increased the capital ratio (determining how much capital banks must hold in case of crisis) and increase the financial coverage ratio.

She adds:

I think that the banking sector is currently in a much much stronger position than it was back in 2008.

We do have tools and facilities on hand too, Lagarde says.

The ECB president adds that “we have all worked hard in the last few days, and particularly the last few hours”.

She says the ECB staff can act quickly and creatively if they need to fight a liquidity crisis.

Our staff…have demonstrated in the past that they can also exercise creativity in very short order, in case it is needed to respond to what could be a liquidity crisis, if there was such a thing.

But, this is not what we are seeing.

Q: How do you see the path for interest rates ahead? You haven’t given any guidance at today’s meeting – have we reached peak interest rates?

Lagarde explains that three components will determine future rate decisions.

Thet are 1) the incoming economic and financial data, 2) the dynamics of underlying inflation, and 3) the strength of monetary policy transmission.

Lagarde adds that:

If our baseline was to persist when the uncertainty reduces we know that we have a lot more ground to cover. But it’s a big caveat.

She also explains that the ECB’s latest forecasts were drawn up before the recent financial tensions blew up, so they do not incorporate any of the most recent developments.

Christine Lagarde then explains that market interest rates rose considerably in the weeks after the ECB’s last meeting in early February.

But, she adds, the increase has “strongly reversed over recent days” amid the severe financial market tensions.

Bank credit to euro area firms has become more expensive. Credit to firms has weakened further, owing to lower demand and tighter credit supply conditions

Household borrowing has become more expensive as well, especially owing to higher mortgage rates.

This rise in borrowincg costs has hit demand, and led to a further slowdown in the growth of loans to households, she adds.

The risks to the outlook for economic growth are tilted to the downside, Christine Lagarde warns.

In a nod to the turmoil in the markets of late, the ECB president says:

Persistently elevated financial market tensions could tighten broader credit conditions more strongly than expected and dampen confidence.

Russia’s unjustified war against Ukraine and its people continues to be a significant downside risk to the eocnomy and could again push up the cost of energy and food.

She adds the could also be a drag on eurozone growth if the global economy weakens more sharply than expected.

Christine Lagarde explains that the euro area stagnated in the 4th quarter of 2022, thus avoiding the contraction which had been previously expected.

She predicts that the economy will recover over coming quarters, and says the eurozone's labour market is strong.

The ECB president says:

“The economy looks set to recover over the coming quarters. Industrial production should pick up as supply conditions improve further, confidence continues to recover and firms work off large order backlogs.”

Lagarde says that government efforts to help households with high energy bills should be temporary and targeted, and designed to encourage people to use less energy.

Christine Lagarde outlines the ECB’s new inflation projections, which are lower than three months ago.

ECB staff now see inflation averaging 5.3% in 2023 (down from 6.3% previously forecast), 2.9% in 2024 (down from 3.4%), and 2.1% in 2025 (down from 2.3%), she says.

But core inflation is a concern.

Lagarde says:

At the same time, underlying price pressures remain strong. Inflation excluding energy and food continued to increase in February and ECB staff expect it to average 4.6% in 2023, which is higher than foreseen in the December projections.