Warning to The Banks: Get Your Act Together!

Projecting that the inflation will remain too high for too long, the Governing Council of the ECB decided to hike rates by 50 bps last week, as anticipated, which shows that the European Central Banks maintains its determination to keep fighting against the inflation.

The press release issued on 16 March says, “The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area.” I believe this decision is driven by the Council’s concern that the US bank collapses might affect the EU economy. However, just like the Fed, the ECB did not provide clear information as to how they will respond exactly to protect the stability.

As far as I understand, this is a warning message from the ECB to the banks, crafted in their signature style: “Get your act together first, before trying to help grow the GDP.” Indeed, European bankers tend to be more cautious than their American counterparts, but there is also the fact that some large banks in some EU countries have been struggling to avoid insolvency for a long time.

US banks invest the money they receive from individuals and corporations in a variety of instruments, while EU banks try to look after the money they have entrusted with through some complex transactions. Another difference between the US and the EU banks is that the former are not a safe haven for those who want to move money from their own country but the latter have met this particular need so far, therefore, prioritizing ‘winning their customers’ trust’ rather than making profit as opposed to the US banking, a chaser of high profits. The Eu banks, on the other hand, said, “Don’t you worry, your money is in reliable hands”. This situation has mitigated the profit pressure on European bankers, but their sharp decision-making skills about asset profitability have weakened over time. Perhaps this is the reason why Turkish bankers in Europe are so successful.

So, the Fed and the ECB, maintaining combat against inflation, are giving the following message to the banks “Do not give out unnecessary loans and fix your liquidity situation”. Sadly, the markets will remain unstable for a while as the EU and the United States are trying to overcome another banking crisis.