finance

With Lagarde stepping down early, Europe must weigh experience and policy priorities in choosing a successor.

Christine Lagarde confirmed today at the European Central Bank’s policy press conference that she would step down as the bank’s president in February, nine months before her term ends in October 2027. She plans to remain in office until after the bank’s February 2027 policy meeting.

Her early departure has brought two leading contenders into focus as European leaders prepare to choose her successor.

Lagarde cited her desire to speak and engage freely on non-monetary policy matters, which the European Central Bank’s presidential neutrality does not allow.

“At this time, in relation to many corners of the world, not just Europe, I think that my voice can help,” she said. “My action can help in relation to principles that are dear to my heart. I don’t think I can be comfortable with that neutrality at the present time. And I’m interested in the truth, and I see the truth being very often damaged, contradicted by misrepresentation.”

Likely Successor

Whoever replaces Lagarde will likely come from the same background. Unlike her three predecessors, she is not a national central bank governor or a classic economist. Lagarde was a lawyer, government minister, and managing director of the International Monetary Fund.

Her political experience helped the European Central Bank, or ECB, when it needed to manage bond purchases and emergency lending to banks, and to provide oversight of various rescue programs with the IMF.

However, she did not have a strong track record of communicating inflation expectations to the market. During the ECB press conference on March 12, 2020, she triggered a market panic when she said that narrowing bond spreads was “not the function or business of the ECB.”

“My guess would be that going forward, whoever they pick, they’re going to want somebody who is better at that part of the job,” said Rebecca Christie, a senior fellow at economic think tank Bruegel. 

The two frontrunners are Spain’s Pablo Hernández de Cos and the Netherlands’ Klaas Knot.

Pablo Hernández de Cos is the general manager of the Bank for International Settlements, or BIS. Previously, he served as the governor of the Bank of Spain, was a member of the ECB’s Governing Council, and chaired the Basel Committee on Banking Supervision and the Advisory Technical Committee of the European Systemic Risk Board.

Klaas Knot is currently a visiting fellow at the Peterson Institute for International Economics. Knot served as president of De Nederlandsche Bank, chaired the Financial Stability Board, and served on the ECB’s Governing Council and General Council, the European Systemic Risk Board, the IMF’s Board of Governors, and the BIS Board of Directors.

“There are some other names in the mix that have come up, but I would say there isn’t a clear third frontrunner,” said Christie.

“As a former head of the G20’s Financial Stability Board, Knot is exceptionally well qualified to handle potential financial risk,”  added Holger Schieding, chief economist at multinational private and merchant bank Berenberg Bank, in an email response.

Whether a candidate is perceived as a “hawk” or a “dove” will likely play less of a role than it did in the past, he said. “Many central bankers have changed their views somewhat on the job, such as [ECB Executive Board member Isabel] Schnabel starting as a dove and ending up as a perceived hawk.”

However, with Schnabel scheduled to leave on Jan. 3, 2027, to become the IMF’s financial counselor and director of the Monetary and Capital Markets Department the following day, Christie said there will be no female representation on the ECB’s Executive Board or among the 21 national central bank governors who constitute its Governing Council.

Smooth Transition 

Any plausible succession outcome would not change Schieding’s outlook on corporate investment and financing, he said.

“As Christine Lagarde clearly articulated today, there are a number of very capable potential candidates for the position of the next ECB president, and the process of selecting her successor is already underway,” said Yael Selfin, Vice Chair and Chief Economist at KPMG in the U.K. “We would therefore expect a relatively smooth transition. Any volatility in financial markets is more likely to be driven by other unfolding events in Europe and beyond.”

Another U.S. bank collapses, and experts wonder whether the failure is a canary in a coal mine or a coincidence.

This article appears in the November issue of Global Finance Magazine.

A sixth U.S. bank failure this year has reignited a familiar question on Wall Street: Is the banking system flashing a 2023-like warning?

California’s Department of Financial Protection and Innovation closed Nano Banc of Irvine, California, on Sept. 25, citing the lender’s deteriorating financial condition, and appointed the Federal Deposit Insurance Corp. as receiver. Sunwest Bank assumed approximately $605 million in Nano Banc’s deposits.

The closure occurred about a month after regulators shut Philadelphia’s Tioga-Franklin Savings Bank. Other failed institutions include Metropolitan Capital Bank & Trust (Chicago), Community Bank and Trust (LaGrange, Georgia), Kentland Federal Savings and Loan Association (Kentland, Indiana), and Small Business Bank (Lenexa, Kansas).

That brings the 2026 tally to six, the most since 2017 and one more than in 2023, when Silicon Valley Bank (SVB), Signature Bank and First Republic Bank collapsed. While most of the experts Global Finance spoke to say the current failures appear small, lingering balance-sheet vulnerabilities mean the underlying risks of 2023 haven’t fully disappeared.

No Rapid Runs Bode Well, but…

“They do share a pattern, but it isn’t the 2023 pattern,” said David Maya, global risk lead at Dublin-based management consultancy Accenture. “No deposit runs. No rate-driven bond losses. Every one of them was a slow failure — weak management, then losses, then the capital ran out.”

According to California’s DFPI, Nano Banc suffered from mismanagement, poor governance and “insider trading risks.” A similar “operational weakness” narrative followed Tioga-Franklin Savings Bank’s closure.

Maya cautioned against alarm. “All six together held about $1.4 billion in assets,” he said. “Silicon Valley Bank alone had $209 billion. This is not that.”

This year’s count is also a far cry from the 507 U.S. bank failures recorded between 2008 and 2014. Still, some industry experts are asking whether the liquidity and interest-rate shocks that toppled larger banks in 2023 are resurfacing.

Stephen Curry, founder and chairman of Endurance Advisory, said the problems exposed in 2023 have been only “partially fixed.”

“Uninsured deposits remain concentrated, and losses on held-to-maturity securities are still substantial,” he said. “To me, the biggest unresolved issue is supervisory follow-through. While the regulators did a good job identifying the problems, they still need to be consistent and timely in enforcing regulatory corrections.”

Lessons From Abroad

Europe offers a sharp contrast. The European Banking Authority said that banks in the European Union and European Economic Area remain resilient, with near-record capital ratios and solid asset quality.

Donald van Deventer, managing director of risk research and quantitative solutions at data and AI company SAS, attributes much of the gap to how mortgages are structured.

“European mortgages are much more likely to be floating rate or fixed rate for fairly short maturities before rate reset,” he said. “The 30-year U.S.-style fixed-rate mortgage is something extremely rare in the European market. So in that sense, there is structurally less interest rate risk embedded in the balance sheets of European banks.”

Most U.S. 30-year mortgages are sold to Fannie Mae and Freddie Mac rather than held by banks. Lenders absorb much of the same rate risk by buying mortgage-backed securities, which were the losses that sank SVB.

Echoes of 1990s Japan

Van Deventer sees a closer parallel in mid-1990s Japan, where he was with Kamakura Corp., which he founded. Real estate prices fell by as much as 80%.

“People in the U.S. at the time said that it could never happen to us,” he said. “Then in 2008-2010, it did.”

The danger, he said, is built into how banks are funded. Deposits can be withdrawn at any time, which he described as a put option no corporation would attach to its own bonds. When a bank’s assets are illiquid and depositors exercise that option, the bank cannot sell assets quickly enough to meet the demand for cash.

That dynamic helped sink Lehman Brothers in 2008. Its real estate-linked securities plunged, and rivals, knowing the firm had to sell, lowered their bids. In 2023, it fueled runs on Silicon Valley Bank and First Republic.

“And I worry we will see it again,” van Deventer said.

Where Maya sees isolated management failures, van Deventer sees the same macro forces at work.

“This year’s bank failures were triggered by the rebound in interest rates to higher levels and price pressure on real estate,” he added. “I have spent my career avoiding making forecasts, but the current environment is remarkably similar to the S&L crisis in the late ’80s and early ’90s. It is very similar to 2008-2010. And similar to Japan in 1996-1997.”

Anthony Noto covers corporate finance and private credit. Contact him at anoto@gfmag.com