UPDATE 2-Europe's banks sucked into global rout as high rates reality hits home

Reuters · 03/10/2023 09:12
UPDATE 2-Europe's banks sucked into global rout as high rates reality hits home

Europe's banks suffer worst day in months

Selloff began in U.S. after tech lender SVB's troubles

Banks rout comes amid end of cheap-money era

Adds detail, background, analysts

By Alun John, Marc Jones and John O'Donnell


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European bank shares tumbled on Friday in the wake of a dramatic sell-off in U.S. bank stocks amid spreading jitters about the sector's vulnerability to the rising cost of money.

The global rout in bank stocks was prompted by Silicon Valley Bank, a major banking partner for the U.S. tech sector, being forced to raise fresh capital after losing $1.8 billion selling a package of bonds to meet depositor demands for cash.

Neil Wilson, Chief Market Analyst at Markets.com, said that the episode could be the "straw that breaks the camel's back" for banks after worries about ever higher interest rates and a fragile U.S. economy.

Europe's STOXX banking index .SX7P fell more than 4% and was set for its biggest one-day slide since early June, with declines for most major lenders, including HSBC HSBA.L, down 4.5%, and Deutsche Bank DBKGn.DE, down 7.9%.

Shares in Italy's UniCredit CRDI.MI and Intesa Sanpaolo ISP.MI also fell sharply.

Although many analysts did see a systemic threat to the global banking system, the effects for lenders of higher central bank interest rates was being felt.


"It is leverage in the system that is the problem," said James Athey, investment director at Abrdn. "Monetary policy way too easy for way too long."


Global borrowing costs have risen at the fastest pace in decades over the last year as the Federal Reserve lifted U.S. rates 450 basis points from zero, while the European Central Bank hiked the euro zone's by 300 bps.


Other parts of Europe and many developing economies have done even more. There are concerns, however, that price inflation is staying high, something that would drive further rate hikes.


The crisis at SVB underscored the vulnerability of banks, many of which were propped up by trillions dollars of taxpayers' cash following the global financial crisis more than a decade ago.


John Cronin, an analyst at Goodbody, said investors were worried about the falling value of banks' investments and how that could hit the capital underpinning their business, as well as savers switching banks for a better deal.


Banks typically invest heavily in government bonds, in particular those of their home country, making them vulnerable to their falling value.


(Writing By John O'Donnell; Additional reporting by Jo Mason and Marc Jones; Editing by Elisa Martinuzzi and Toby Chopra)

((john.odonnell@thomsonreuters.com;))