European zone banks are advised to monitor their funding sources or they risk being "trapped" by rising interest rates, European Central Bank banking supervisor Andrea Enria said on Tuesday.
Introducing the ECB's annual report on banking supervision, Enria said European zone banks remained strong but warned that a sharp rise in borrowing costs over the past year meant lenders could no longer rely on cheap funding and rising financial markets.
"Rising interest rates and quantitative tightening require banks to increase their focus on liquidity and funding risks," Enria said, in an ECB statement issued before the recent turmoil in the global banking system.
"There is a risk that banks may be trapped," he said in a warning to the banking industry.
The global financial system is in disarray after two major banks, Silicon Valley Bank of the United States and Switzerland's Credit Suisse ran out of cash, albeit for different reasons.
Enria's report warned banks of the potential hit to their net worth as borrowing costs rise. This was a major problem at SVB, which had invested customer deposits without value protection against the risk of rising rates, which ultimately led to the bank's problems.
He continued, "Banks should adopt strong asset and liability management modeling practices in a situation where interest rates are changing higher and higher". "They should also carefully monitor the risks arising from hedging derivatives."
Credit Suisse has also experienced large deposit outflows, particularly from its international business, following several financial scandals.
Enria is expected to appear before the European Parliament today and may provide an update on the health of the European zone's banking system.
