The European banking system is in a stronger position to weather dented confidence in credit markets than it was when it went into the global financial crisis.
The region’s lenders are better capitalized, have better liquidity and are more operationally focused after decades of restructuring, according to Andrew Buchanan, head of financial institutions group, Peel Hunt Ltd.
The status and liquidity of Europe’s banks were questioned amid the collapse of Silicon Valley Bank, the seizure of Signature Bank in the US and the takeover of Credit Suisse AG by rival UBS Group AG in Europe.
“Fundamentally, European banks aren’t directly exposed to the asset class that brought down Silicon Valley Bank,” Buchanan said, speaking at S&P Global Market Intelligence’s March 24 webinar. “They are, however, exposed to the broader macro trend, which is interest rate normalization, a partial driver of SVBs failures.”
Watch a replay of the webinar.
SVB’s failure stemmed from its lack of liquidity to support its depositor requirements and the capital strength to deal with unrealized losses, Buchanan said, adding that while SVB ran into unrealized losses on its portfolios, it is not a concern for European banks.
Unrealized losses are not intrinsically problematic and should be considered in context. “Typically, they arise when the quality of the underlying cash flows that back those securities deteriorates or their relative values change, and the latter is what we see at the moment,” Buchanan said.
US and Swiss government action taken on their troubled banks does not pose a moral hazard in the global banking system, James Worsnip, partner and managing director, AlixPartners UK LLP said. The consequences of the treatment of Credit Suisse’s additional Tier 1 (AT1) bonds, for example, may be limited to Switzerland as it differs from how resolution works across the EU, Worsnip said. Investor confidence has been damaged, and needs to be repaired, he added.
Forced mergers are unlikely to become the go-to option within a broader bank resolution framework, Worsnip said.
Credit Suisse had little option other than an offer to a large foreign bank, Tobias Miarka, head of corporate banking, Coalition Greenwich, said. Miarka added that it is unclear whether viable buyers would have been available considering the limited time frame of the UBS-Credit Suisse deal.
Dented confidence
Investor sentiment has deteriorated over the past two weeks and is unlikely to reverse in the near term, Max Kettner, chief multi-asset strategist, HSBC Holdings PLC, said. “We can see that in several metrics. We look at, for example, options-based sentiment, implied volatilities in some of the banking indices and banking ETFs.”
Consumers can react faster than banks to market rumors, and the ease and speed with which deposits can be withdrawn make bank runs an even great challenge in the digital age, Miarka said.
Corporates are also reviewing their relationships with banks, but Miarka said Europe’s investment banking market has a wide range of competent players.
Both large and small banks could be affected by the challenges, depending on their balance sheets and business models, Buchanan said. “At a systemic level, the smaller banks are less captured by some regulatory regimes. That’s not to say that they have no significant potential situations regarding capitalization or liquidity.”
Overall, the industry is still going through a process of normalization, he said. “That is not an easy fix or transition, and it takes time.”
READ MORE about the liquidity crunch and the fallout for the financial sector in our new Issue in Focus.
