Europe’s banks sucked into global rout as high rates reality hits home

John O’Donnell, Marc Jones and Alun John

LONDON/FRANKFURT (Reuters) – 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.

Silicon Valley Bank was a major bank partner in the U.S. tech industry and was forced to raise capital after it lost $1.8 billion on a package bond to satisfy cash demand.

Neil Wilson, Markets.com’s Chief Market Analyst, stated that the episode could be the “straw that breaks the camel’s back” For banks, after concerns about ever higher interest rate and a fragile U.S. economic.

Europe’s STOXX Banking Index fell more than 4%. It was on track for its worst one-day slide ever since early June. The declines of most major lenders, including HSBC and Deutsche Bank, were 7.9% and 4.5% respectively.

The shares of Italy’s UniCredit, Intesa Sanpaolo and Intesa Sanpaolo also dropped sharply.

Although analysts were unable to see a systemic threat in the global banking system, lenders are now feeling the negative effects of higher central bank rates.

“It is leverage in the system that is the problem,” James Athey, Abrdn’s investment manager, said: “Monetary policy way too easy for way too long.”

Global borrowing costs rose at the fastest rate in decades last year after the Federal Reserve lifted U.S. interest rates by 450bps from near zero and the European Central Bank raised euro zone’s rates by 300bps.

Other parts of Europe, as well as many emerging economies, have achieved even greater results. There are worries that price inflation will continue to be high and that this could drive higher rates.

SVB’s financial crisis was a reminder of the vulnerability banks. Many were propped up with trillions of dollars in taxpayer cash, following the global financial crises more than ten years ago.

John Cronin is an analyst at Goodbody. He said investors were concerned about the decline in bank investments and how this could affect their business. Savers also might switch banks to get better deals.

Banks invest heavily in government bonds, especially those from their home country. This makes them more vulnerable to falling values.

Graphic: The race to raise rates https://www.conservativenewsdaily.net/breaking-news/wp-content/uploads/2023/03/localimages/chart.png640b0d2a970bb.png

(Writing By John O’Donnell; additional reporting by Jo Mason, Marc Jones; editing by Elisa Martinuzzi, Toby Chopra).