Aurelia Butler

Depositors have withdrawn €214bn from eurozone banks over the past five months, with outflows hitting a record level in February, according to data published by the European Central Bank on Monday.The fall in eurozone bank deposits, which started a few months after the ECB began raising interest rates last summer, marks a reversal from the large amounts of money that had been pouring into banks — particularly since the pandemic.The recent outflows indicate banks were finding it harder to attract and retain depositors even before this month’s turmoil in the banking sector, which caused the collapse of three US lenders and drove Credit Suisse into the arms of UBS.In February, the decline accelerated as depositors cut their holdings at eurozone banks by €71.4bn, which was the biggest reduction since records began in 1997. Household deposits fell by €20.6bn, the largest fall since that data started to be collected in 2003.The withdrawals in the five months since October were worth 1.5 per cent of the almost €14tn that eurozone banks held for depositors and were less than the $500bn of deposits that have been pulled out of US banks in the past year.In the UK, there have been similar outflows of deposits by corporate customers, which withdrew £20.3bn from British banks and building societies in January, a record since this data started being collected in 2009, according to the latest Bank of England figures. However, UK household deposits continued to grow by £3.5bn.Banks in the eurozone have been slow to pass on higher interest rates to depositors. The ECB raised its deposit rate to 3 per cent this month, but the highest instant access rate for savers at German banks is 1.6 per cent, according to deposit broker Raisin. This has prompted a switch from instant access accounts to longer term savings accounts offering higher rates. Overnight deposits at eurozone banks fell €140bn in February, taking the decline over the past six months to €512bn. However, this was partially offset by an increase in deposits with an agreed maturity up to two years, which rose by €83bn in February and by €476.3bn in the past six months. Savers have also put more cash into money market funds and debt securities issued by banks.The ECB said some of the withdrawn deposits were invested back into eurozone banks, which boosted their funding by issuing €155bn of bonds — more than two-thirds of them long-term securities — in the six months to February.“The data show that savers continued to tie up their cash in less liquid but higher yielding forms of money,” said Jack Allen-Reynolds, an economist at research group Capital Economics. While depositors are reducing their overall holdings at eurozone banks, Allen-Reynolds said “they invested some of that money into bonds issued by banks, so this isn’t necessarily a sign that customers were losing faith in the banking system.”Total lending by banks to eurozone customers fell for the third consecutive month in February, taking the total three-month decline to €72bn and ending nearly five years of consistent growth. Economists think this month’s turmoil in the banking sector is likely to make lenders more cautious, squeezing credit supply.“We expect loan growth to continue to slow down over the short term, and start recovering at a later stage when short-term rates find stability and the economic environment improves,” banking analysts at Jefferies said in a note. More

The Federal Reserve’s top official on banking supervision has blamed the collapse of Silicon Valley Bank on a “textbook case of mismanagement”, saying the board of the US central bank had been briefed on the troubles at the California lender in mid-February.In congressional hearing testimony released ahead of an expected grilling on SVB’s failure by US lawmakers on Tuesday, Michael Barr, the Fed’s vice-chair for supervision, criticised the bank’s “concentrated business model”.He also proposed a possible tightening of banking rules to avoid similar incidents in the future, and said US regulators were ready to intervene again if necessary.“We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound,” Barr said.The Fed has launched a review of SVB’s collapse, which is due to be released by May 1, but Barr suggested the bank had made a number of critical errors as it grew in recent years.“During the early phase of the [coronavirus] pandemic, and with the tech sector booming, SVB saw significant deposit growth. The bank invested the proceeds of these deposits in longer-term securities, to boost yield and increase its profits. However, the bank did not effectively manage the interest rate risk of those securities or develop effective interest rate risk measurement tools, models and metrics“At the same time, the bank failed to manage the risks of its liabilities. These liabilities were largely composed of deposits from venture capital firms and the tech sector, which were highly concentrated and could be volatile.”The Fed has already faced criticism that it was not quick enough to spot the vulnerabilities at SVB. Barr said supervisors had found “deficiencies” at the lender dating back to late 2021, and had met with the bank’s management in November 2022 “to express concern with the bank’s interest rate risk profile”. However, Fed staff had only briefed the central bank’s board of governors in mid-February of this year.

“Staff discussed the issues broadly, and highlighted SVB’s interest rate and liquidity risk in particular,” Barr said. “Staff relayed that they were actively engaged with SVB but, as it turned out, the full extent of the bank’s vulnerability was not apparent until the unexpected bank run on March 9.”Barr said “the failure of SVB illustrates the need to move forward with our work to improve the resilience of the banking system”. He said it was “critical that we propose and implement the Basel III endgame reforms”, referring to rules that would require banks to maintain certain leverage ratios and keep certain amounts of capital on hand.He said such reforms would “better reflect trading and operational risks in our measure of banks’ capital needs”.Barr said the Fed planned to propose “a long-term debt requirement for large banks that are not [globally systemic] so that they have a cushion of loss-absorbing resources to support their stabilisation”. He said the Fed would have to “enhance our stress testing with multiple scenarios so that it captures a wider range of risk and uncovers channels for contagion, like those we saw in the recent series of events”.In separate testimony released on Monday, Martin Gruenberg, chair of the Federal Deposit Insurance Corporation, called for “special attention” to be paid to the regulation of banks with more than $100bn in assets, as well as a focus on “the methods for planning and carrying out” resolutions of such banks.He also said the FDIC would by May 1 propose policy options for changing the $250,000 limit for insured deposits — a focal point of debate in recent weeks. While Gruenberg said there had been a “moderation” in deposit outflows since the start of the banking turmoil early this month, he noted banks were still reporting that corporate depositors were shifting money to “diversify their exposure and increase their insured deposit coverage”.He also warned that the US financial system continued to face “significant downside risks from the effects of inflation, rising market interest rates, and continuing geopolitical uncertainties”. “Credit quality and profitability may weaken due to these risks, potentially resulting in tighter loan underwriting, slower loan growth, higher provision expenses and liquidity constraints.” More

Andrew Bailey, governor of the Bank of England, said on Monday that recent financial turmoil would not stand in the way of the central bank controlling inflation with high interest rates.In a speech at the London School of Economics, Bailey stressed that the UK financial system was “resilient, with robust capital and liquidity positions, and well placed to support the economy”. He made no reference to the possibility that lending might be curtailed, instead reiterating the BoE’s position that interest rates would need to rise further if “any signs of persistent inflationary pressures” were detected. “We have to be very alert . . . If they [the signs] become evident, further monetary tightening would be required,” he said.In questions after his speech, Bailey insisted that nothing had recently happened in financial markets to make the nine members of the Monetary Policy Committee, who set the base rate, act in ways to sooth tensions. “Monetary policy has to take into account credit conditions . . . and we do,” he said. “The key distinction is we have a financial stability policy that is ensuring financial stability and we did not have to sit down [at the recent MPC meeting] and say: ‘Do we need to use monetary policy to ensure financial stability?’”

Following the latest rise in interest rates to 4.25 per cent last week, Bailey said the BoE had not already decided that interest rates needed to increase further but noted that inflation of 10.4 per cent in February was “much too high”. He stressed that the MPC would assess the “emerging evidence” before opting to lift rates again. Bailey’s speech focused largely on the importance of considering the ability of the economy to supply goods and services without generating inflation when setting monetary policy. He said the main problem the BoE faced, as the peak of the pandemic passed in 2021, was strong spending combined with a weaker than expected supply of labour. Coupled with strains in global supply chains and Russia’s invasion of Ukraine, Bailey said this trend had caused inflation to hit double-digit rates not seen for 40 years. Price rises were now waning with lower wholesale gas costs, he said, adding: “It is primarily for this reason that we expect to see a sharp fall in inflation during the course of this year, starting probably in a couple of months or so from now.” More

Today’s top storiesIsrael is facing a political crisis with Benjamin Netanyahu’s hardline government on the end of a growing backlash against its plans to overhaul the judiciary. Netanyahu sacked his defence minister for urging a delay, while flights were grounded, shipments halted and banks were shut as protests escalated.The ruling Scottish National party elected health secretary Humza Yousaf as its new leader and presumptive first minister of Scotland to replace Nicola Sturgeon, who announced her resignation last month.Vaccine maker BioNTech forecast a worse than expected dip in revenues this year as demand for coronavirus shots wanes, highlighting the challenges facing companies that enjoyed windfalls from the pandemic. Revenues from Covid-19 vaccines are expected to drop to about €5bn in 2023, compared with €17bn in 2022 and €19bn in 2021.For up-to-the-minute news updates, visit our live blogGood evening.The turmoil in the global banking sector may have calmed but its consequences — whether on the global economy, business, investors or the future of regulation — could have a lasting impact.The World Bank said today that if the current run of financial news sparked a recession, it could contribute to a lost decade of growth for the global economy. It follows a warning from IMF chief economist Kristalina Georgieva at the weekend of increased risks to financial stability and the need for vigilance following the upheavals, which have added to challenges related to the pandemic, the war in Europe and the global surge in inflation. In the UK, the boss of insurer Legal & General said the banking turmoil would hit the government’s levelling up programme by making lending more difficult and affecting the supply of new affordable housing.From an investment point of view, the disruption is likely to have hastened the end of rapid rises in interest rates as well as boosted safe havens such as gold.Victims of the collapse of Silicon Valley Bank in the US, which sparked the recent problems, range far beyond the tech sector, where it played a pivotal role in lending to industries such as winemaking. Start-ups have been left with a giant funding hole: SVB was responsible for a tenth of all venture debt issued in the US this year, and in its home state of California the bank was behind more than 60 per cent of all deals this year.The biggest focus, however, is on banking itself. Bank runs are nothing new, the Lex column (for premium subscribers) reminds us, as it draws parallels with past crises and how they often lead to business cycle downturns.The current troubles have also put regulations back in the spotlight.Switzerland’s finance minister Karin Keller-Sutter — who was at the centre of the rush to rescue Credit Suisse last weekend — said the rules for winding up big banks did not work, and that following emergency protocols at the centre of the regulatory architecture “would have triggered an international financial crisis”.Bosses in the City of London, meanwhile, are bracing for tighter oversight, even as the UK government said it would push ahead with its rule changes known as the Edinburgh reforms, widely seen as an easing the post-financial crisis restrictions. There could, however, now be more pushback from regulators and from the Bank of England, whose governor Andrew Bailey has already warned against City deregulation.Ruchir Sharma, FT columnist and chair of Rockefeller International, says governments are making problems for themselves with a culture of bailouts and state support, which bloat and thereby destabilise the global financial system. “The past few decades of easy money created markets so large — nearing five times larger than the world economy — and so intertwined that the failure of even a midsize bank risks global contagion,” he writes. Intervening in bank runs can limit the damage, Lex says, but it also dilutes the incentive to guard against financial risks. “No wonder many financial regulators pay close attention to history,” it concludes. “Their tools and understanding are more sophisticated than in the past. But the underlying dilemma is not much changed.”Need to know: UK and Europe economyMartha Lane Fox, “dotcom dinosaur” and new president of the British Chambers of Commerce, warned that businesses were holding off big decisions because of political and economic upheavals. “People just don’t feel like taking risks, investing or thinking about international trade when they’re still feeling anxious about the political situation and the economy,” she said.Russia has adopted China’s renminbi as one of the main currencies for its international reserves, overseas trade and even some personal banking services. Moscow’s pivot towards China follows the freezing of $300bn of international assets and moves to exclude its main banks from global markets.Need to know: global economyKunshan, a county in eastern China known as an exports powerhouse, is suffering a slump as global demand wanes and tensions with the US push groups to relocate production overseas. New data today highlighted the fall in China’s industrial profits, while the new head of AP Møller-Maersk, the world’s second-largest container shipping group, said the country’s economic rebound was weaker than expected. Iraq is being rocked by a currency crisis, highlighting the fragility of its oil-dependent economy. The country’s authorities in November implemented tough rules to stamp out money laundering and cash flowing abroad, but this has had the unintended consequence of cutting the supply of dollars. Need to know: businessAlibaba founder Jack Ma has returned to China in a rare public visit that Beijing hopes will help reinvigorate confidence for entrepreneurs after a bruising period of pandemic restrictions and regulatory crackdowns.Investors have poured cash into US money market funds over the past two weeks as the banking upheavals sparked concerns about the safety of bank deposits. Goldman Sachs, JPMorgan Chase and Fidelity are the biggest winners.Swedish start-up Northvolt is in talks to secure more than $5bn of financing to pursue its goal of becoming Europe’s biggest battery manufacturer. Although European industrial groups have criticised the EU’s response to US green subsidies, battery makers have been more welcoming. The global wind sector is set to be squeezed by bottlenecks for key components and ships, with spare capacity “likely to disappear by 2026”, according to an industry body. Much of the sector’s supply chain is concentrated in China.“We’re out of ammunition because of too many cat videos” may be a phrase unlikely to be heard on the battlefield, but one unintended consequence of a new data centre for TikTok in central Norway is that it is using up all the area’s spare electricity and hurting production at Nammo, one of Europe’s largest makers of ammunition. The world of workA growing number of US states are passing pay transparency laws — and sparking a flurry of disputes about disparities as workers find out for the first time what their colleagues are earning. If chief executives didn’t define themselves so completely by their work, retirement would be less frightening. Margaret Heffernan, author of Uncharted: How to Navigate the Future, discusses succession planning. Increases in UK life expectancy have stalled, focusing attention on proposed changes in the retirement age, the Lex column notes.FT Alphaville runs the rule over a new report from Goldman Sachs on the effects of artificial intelligence on the job market. In haiku form (you’ll have to read the note) it boils down to this: AI’s job impact, Productivity growth raised, A workforce displaced.Some good newsA new water treatment developed at the University of British Columbia can remove “forever chemicals” from drinking water for good. Formally known as PFAS (per-and polyfluoroalkyl substances), forever chemicals are a large group of substances that make certain products non-stick or stain-resistant. More

The global economy is in danger of suffering a lost decade of growth, which would be even more severe if the current financial turmoil sparked a global recession, according to new research from the World Bank.The international organisation warned on Monday that the Covid-19 pandemic and Russia’s invasion of Ukraine were set to create lasting damage to economic performance, undermining efforts to improve global living standards, reduce poverty and address climate change. Its research showed that recent setbacks to the world economy have had more lasting effects and would reduce growth rates this decade by a third, compared with the first 10 years of this century.Indermit Gill, the World Bank’s chief economist, said the fall in the level of sustainable growth was caused by “less work, less investment and less trade” than in the more rapid periods of growth and development in the 1990s and 2000s.The bank projected that the growth rate the global economy could sustain this decade would be only 2.2 per cent a year for the rest of this decade, down from annual rates of 2.6 per cent between 2011 and 2021 and 3.5 per cent in the first decade of this century. The average global growth rates are calculated market exchange rates and are lower than comparable figures from the IMF which gives more weight to developing countries. The research showed that the pandemic created huge uncertainties for companies and lowered investment growth rates in the world to an annual rate of 3.5 per cent, half the level of the past two decades. It also harmed children’s education, which in turn hit workplace skills and led to fewer people working than had been expected, across a large number of countries. Russia’s invasion of Ukraine increased uncertainties and reduced investment further, especially in Europe, the World Bank said. Geopolitical tension since 2010 had left global trade barely growing as fast as the world economy. Ayhan Kose, who runs the equitable growth, finance and institutions work at the World Bank, said the combination of these factors means “the golden era of development appears to be coming to an end”. With the bank’s stress on the lasting damage from crises, whether related to health, economics or geopolitics, he said the past two week’s turmoil in financial markets were of great concern for economic prospects now and for the next four to five years. “What we know is that the slowdown [in global growth prospects] could be much sharper if another financial crisis erupts, especially if it is accompanied by another global recession,” he said. The World Bank stressed that a decade of lost growth was not inevitable, but required “a Herculean collective policy effort to restore growth in the next decade to the average of the previous one”.The most promising routes to higher growth around the world were ensuring a big boost to investment and labour force participation, particularly of women and older workers. More