The European Union banking sector is resilient because it has strong capital and liquidity positions, European Union leaders said in a statement after a summit today.
"The Banking Union has significantly strengthened the resilience of the EU banking system. Our banking sector is resilient, with strong capital and liquidity positions," the statement said.
European banking stocks fell sharply again today, with Deutsche Bank and UBS knocked by worries that actions by regulators and central banks have yet to contain the worst problems to face the sector since the 2008 financial crisis.
Dutch Prime Minister Mark Rutte said it was very unlikely the euro zone would plunge into a new banking crisis because the sector was far stronger than a decade ago.
"That is very unlikely if you see how we have organised things in Europe," he said.
Still, Deutsche Bank shares fell for a third day, dropping more than 12% after a sharp jump in the cost of insuring its bonds against the risk of default.
German Chancellor Olaf Scholz dismissed market concerns over his country's biggest bank.
"Deutsche Bank has fundamentally modernised and reorganised its business model. It is a very profitable bank, and there is no reason for concern," Scholz told reporters.
European Central Bank head Christine Lagarde told EU leaders that European banks were safe but called on governments to push on with a stalled EU deposit insurance scheme, officials said.
"The euro area banking sector is strong because we have applied the regulatory reforms agreed internationally after the Global Financial Crisis to all of them," Lagarde said, adding that the ECB's "toolkit" was fully equipped to provide liquidity to the system if needed.
Defending the ECB's push to raise interest rates to stamp out high inflation at a time of turbulence in the financial sector, Lagarde said there was no trade off between fighting inflation and keeping the banking sector stable.
"Our toolbox enables us to address risks to both," she told the leaders, according to EU officials. "We are determined to bring back inflation to 2%. We will decide on future rates based on incoming data," she was reported as saying.
French President Emmanuel Macron also told reporters that the normalisation of interest rates was not a threat to the banking system.
Still, Lagarde called on the leaders to push on with their banking union project, started in 2012, which still lacks a European Deposit Insurance Scheme (EDIS) that would strengthen or replace the existing patchwork of national schemes.
"Completing the Banking Union" is EU code for introducing EDIS as the missing element from a project that has already created a pan-euro zone bank supervisor and a single resolution authority with a special fund to resolve failing lenders.
While most EU countries have some form of national insurance that guarantees deposits up to 100,000 euros ($108,300), there is no EU-wide scheme, nor a way for authorities to work across borders if a crisis is too much for one country alone.
The main opponent of EDIS is Germany, concerned that if deposit guarantees are mutualised at the EU level, Berlin could end up paying deposits of failing banks in other countries, like Italy, still burdened with poor credit or investment decisions from years ago.
Composition of inflation changing
Earlier, Minister for Public Expenditure and president of the Eurogroup Paschal Donohoe warned that inflation is not declining in non-energy sectors of the economy and in some cases is increasing.
Speaking ahead of the summit of euro zone leaders in Brussels, Mr Donohoe also said that Ireland will have to move away from broad-based energy supports ahead of next winter.
"We are seeing some signs at the moment that the composition of inflation is beginning to change. We're seeing some indications that the price of food, the price of services are also beginning to change," the Minister said today.
"Even though inflation is going down a bit, and it's mainly going down because the price of energy is showing signs of beginning to decrease, we're also saying [that] other goods that are part of how we measure inflation, are either not going down with the speed would we would want or are beginning to show some signs of increasing," he said.
Mr Donohoe said there would be scope for cost of living supports but hinted it would be unlikely that energy supports would continue into the winter.
"The exact scale of the supports as part of our budget next year and budgets to come will have to be defined when we get to the winter," he said.
"But what it does mean is, if we're in an environment in which the cost of energy has come down, and we think it has come down between now and the approaching winter, that the level of energy support has to change," he added.
Mr Donohoe was due to address EU leaders on the euro zone economy alongside the ECB President Christine Lagarde, with a focus on inflation and whether or not interest rates would still rise.
"Inflation will form part of the briefing - and we will be making the point that, even though inflation has come down in the euro area, and in some economies, it is still high," he stated.
He told reporters that this would require a change in budgetary policy across the euro zone.
"The Eurogroup on two occasions and the last number of months has acknowledged that at a time in which inflation is still high and the cost of borrowing is going up, that the decisions that finance ministers will have to take this year and next year will need to gradually change," Paschal Donohoe said.
"And it is why it was so important in Ireland that as we moved into the summer, we moved away from the broad based energy support measures that we had in place at the end of last year," he said.
"Because we are in a difficult moment, the consequences of the war and inflation could be with us for some time and we need to ensure that measures that we have in place are affordable, but also sustainable," he added.
Meanwhile, the EU leaders were to be briefed by the European Central Bank about the risks of contagion in the banking sector.
It follows the collapse of Silicon Valley Bank in the US and the subsequent takeover of Credit Suisse by UBS.
Ms Lagarde was due to update leaders on the prospects of further interest rises as Europe continues to struggle with high inflation.
She is expected to say that Europe should press ahead with initiatives dating back to the last financial crisis 15 years ago, namely an EU wide deposit insurance scheme and the forging of a wider banking and capital markets union.
The collapse of Silicon Valley Bank was linked to the recent hike in interest rates in the US, which has prompted calls for the ECB to pause its own rate increases.
Ms Lagarde is unlikely to commit to such a move. The bank has been determined to use interest rates to bring down inflation.
EU leaders were expected to ask the European Commission to move ahead with reform of the debt and deficit rules governing the single currency, the so-called Maastricht Criteria.
Those rules have been relaxed since the Covid-19 pandemic and there is an expectation that they will be made more flexible to cope with long-term economic challenges.
Additional reporting: Reuters
