The logos of SVB (Silicon Valley Bank), JP Morgan, Bank of America, Citibank and Wells Fargo are seen through broken glass in this photo taken on March 10, 2023. | Image Credit: Reuters
European bank shares fell on March 10 following a dramatic sell-off among US lenders as concern spread that the sector would be vulnerable to a rising currency.
Europe’s STOXX banking index fell more than 4%, set for its biggest one-day slide since early June, with declines for most major lenders, including HSBC, down by 4.5%, and Deutsche Bank, down 7.9%. Shares in Italy’s UniCredit and Intesa Sanpaolo also fell sharply.
The global rout in bank stocks was prompted by Silicon Valley Bank (SVB), a key banking partner for the US tech sector, which was forced to raise new capital after selling a package of loss-making bonds to meet depositor demands for cash.
“The market is treating this as a potential risk of contagion,” said Antoine Bouvet, senior rates strategist at ING in London.
“It makes sense to me that a remote possibility of a crisis in the entire US banking system should also have a small possibility of spreading to Europe,” he said.
Already battered, the sector could face another bout of turmoil later on Friday if US jobs data points to a further rise in interest rates.
Shares in major US banks such as JPMorgan Chase & Co and Citigroup are set to fall again when Wall Street reopens.
The SVB crisis highlighted the risks to banks from the end of easy money. Banks typically invest heavily in government bonds, especially in their home country. Rising interest rates have led to a sell-off in bonds, leaving banks exposed to potential losses on the securities they hold.
John Cronin, an analyst at Goodbody, said investors are concerned about the fall in the value of banks’ investments and how this will affect the capital underlying their business, as well as savers moving in. of banks for a better deal.
Offering higher deposits to attract customers can also eat into bank profits.
Global borrowing costs rose at their fastest pace in decades last year as the Federal Reserve lifted US rates by 450 basis points from near zero, while the European Central Bank raised the euro zone’s 300 bps.
The rest of Europe and many developing economies have done more. There are concerns, however, that price inflation remains high, something that will drive further rate hikes.
Neil Wilson, Chief Market Analyst at Markets.com, said the SVB episode could be the “straw that breaks the camel’s back” for banks after concerns about higher interest rates and a fragile US economy.
“It’s the leverage in the system that’s the problem,” said James Athey, investment director at Abrdn. “Fiscal policy has been too easy for too long.”