Finance
European banking watchdogs step up guard amid market rout
Published by Global Banking & Finance Review®
Posted on April 8, 2025
4 min readLast updated: January 24, 2026
Global Banking & Finance Review®
Company
Published by Global Banking & Finance Review®
Posted on April 8, 2025
4 min readLast updated: January 24, 2026
European banking regulators are closely monitoring markets amid global volatility, focusing on liquidity and bond spreads to ensure stability.
By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) -Central bankers and supervisors in the euro zone, Britain and Switzerland have increased their monitoring of banks and markets amid a trade-war-driven rout in global stocks but have found no reason for alarm yet.
Stocks around the world have fallen sharply since U.S. President Donald Trump unveiled sweeping global tariffs, stoking fears of a recession in the world's largest economy and a potentially destabilising market crash.
The European Central Bank, which sets interest rates for the euro zone and oversees its biggest banks, has heightened its level of scrutiny because market selloffs can translate to damage to the real economy if they last long enough, four sources told Reuters.
ECB supervisors have been calling banks on their watch more frequently than usual to check on deposits and other forms of funding. The feedback so far has been reassuring, the sources said, a point also made by Bank of Spain supervisor Mercedes Olano.
ECB central bankers and market regulators in Switzerland and France were also reassured to see that market liquidity had not dried up, meaning sellers could easily find buyers, even for large positions.
The market operates in very large volumes, allowing all investors to trade according to their needs, French market watchdog AMF said in an emailed statement.
A source said that the Bank of England was also monitoring the markets for any liquidity strains.
ECB policymakers, who unlike their peers elsewhere in Europe, have to contend with a bloc of 20 different economies, have zeroed in on government bond spreads, or the premium that weaker borrowers pay over the euro zone's safe haven, Germany.
Seen as a measure of investor confidence in the euro zone, spreads have widened slightly but remained under control. Italy's 10-year bonds, for example, were yielding just 122 basis points more than their German counterparts.
This is a far cry from the 250 basis points spread investors were demanding to own Italian debt at the height of the COVID pandemic in 2020 and when the ECB began raising rates in 2022.
SHORT-TERM OVERREACTION
Speaking in Spain on Tuesday, ECB Vice-President Luis de Guindos said markets "always overreact in the short term" and had to find a new equilibrium in a new, more fragmented world where growth will likely be lower and inflation higher.
The euro was also rising against the dollar as the world reassessed the United States' economic prospects and diversified away from the U.S. currency, de Guindos and others noted.
While the situation in Europe remained under control, officials in the euro zone and Switzerland were still worried about trouble spilling over from Wall Street and particularly from funds acting as lenders.
"It is very important that we primarily follow developments in the so-called non-bank financial institution sector, which includes hedge funds, private equity funds, credit funds and so on," Switzerland's top market regulator Stefan Walter told Reuters on Tuesday.
ECB sources also flagged the risk that damage at these so-called shadow banks could ricochet on the traditional banking system.
Another ECB source flagged a spike in volatility - as evidenced by the widely monitored VIX index that measures option prices on U.S. stocks - as an indication that financing conditions were worsening on capital markets.
ECB policymakers were set to compare notes at a meeting of the European Union's financial policymakers in Warsaw later this week. But sources said an in-depth discussion would only happen at a Governing Council meeting next week, when the ECB is expected to cut rates.
An ECB spokesperson declined to comment.
(Additional Reporting By Jesus Aguado, Ariane Luthi, Mathieu Rosemain and Stefania Spezzati; editing by Alison Williams and Sharon Singleton)
The article discusses how European banking regulators are increasing their monitoring of banks and markets amid global market volatility.
They are concerned about the impact of global stock sell-offs on bank liquidity and the potential risks from non-bank financial institutions.
The ECB is increasing scrutiny on bank liquidity, monitoring government bond spreads, and preparing for further discussions on financial stability.
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