News of the week - 05/21/2023

The ECB is considering stricter regulations regarding liquidity for European banks.

The European Central Bank is intensifying its scrutiny of bank liquidity reserves, considering the possibility of imposing stricter requirements on individual financial institutions later this year. This heightened focus on liquidity management is a response to recent financial turmoil, including the collapse of Credit Suisse and Silicon Valley Bank, which raised concerns about the banks' preparations to withstand deposit pressures.

While liquidity has always been a vital aspect of banking supervision, recent emphasis had been on bank capital and credit risk, due to the era of low interest rates (meaning banks could access liquidity at a very cheap price). However, the ECB initiated a shift toward emphasizing liquidity in late 2021 as rising inflation signaled increased funding costs.

The ECB's annual risk review of banks is expected to pay more attention to the management of liquid funds, potentially imposing stricter requirements on metrics like the liquidity coverage ratio (the ratio of highly liquid assets held by banks relative to their cash outflow over a certain period of time). Wealthy client deposits will be a particular focus, as large individual withdrawals can quickly deplete a bank's liquidity reserves.

European bankers and regulators note that the Credit Suisse situation was unique and shouldn't be directly compared to events in the US. They also point out that European banks’ exposure to interest rate risk is lower than that of their US counterparts, and they already have higher liquidity coverage requirements.

 

European Commission raises its inflation forecasts

The European Commission has increased its inflation forecasts for the Eurozone, citing growing underlying pressures. The new projections indicate consumer price growth of 5.8% in 2023 and 2.8% in 2024, up from the previous estimates of 5.6% and 2.5%.

Key to the heightened inflation outlook is the Commission's assessment of core inflation, which excludes volatile components like food. The core inflation measure is expected to surpass headline inflation both in 2023 and 2024, adding to the challenges faced by European Central Bank policymakers.

The Commission anticipates that inflation will gradually decline as profit margins absorb higher wages, and tighter financing conditions cool demand. However, persistently high price pressures in services, along with pressures in processed food and goods, are expected to keep price rises elevated.

The Commission's growth forecasts are also more optimistic, projecting a 1.1% rise in Euro-zone GDP for 2023, and a 1.6% increase in 2024.

Notably, it forecast no recession in any Eurozone country during this period, excepted for Estonia which is expected to experience a 0.4% decline in 2023, and for Sweden which is projected to have a 0.5% decline.

 

A recession in the US would cost millions of jobs

Amid expectations of a forthcoming US recession, the impact on American workers is a subject of concern. While each recession is unique and depends on various factors, including its cause and duration, economic forecasts suggest that job losses are on the horizon.

A FED of Atlanta model anticipates the US economy losing about 1.7 million jobs over the next year. Forecasting the exact timing and magnitude of a recession is challenging, and while economists describe the expected downturn as "mild," it would still entail significant job losses.

Many banks predict a recession starting in the third quarter of the year, with a rise in unemployment estimated between 1.1 million and 3.4 million at its peak. The median projection among Fed board members and regional bank presidents in March was for unemployment to rise to 4.5% in the fourth quarter of 2023 and remain elevated in 2024. This equates to around 128,000 job losses each month through the end of the year.