SVB (Silicon Valley Bank), JP Morgan, Bank of America, Citibank and Wells Fargo logos can be seen through broken glass in this illustration taken on March 10, 2023. Photo Credit: Reuters
European bank shares tumbled on March 10 in the wake of a dramatic selloff in US lenders as concerns spread that the sector would be vulnerable to rising money costs.
Europe’s STOXX banking index fell more than 4%, set for its biggest one-day drop since early June, with most major lenders in decline including HSBC, down 4.5% and Deutsche Bank, down 7.9%. Shares of Italy’s UniCredit and Intesa Sanpaolo also fell sharply.
The global decline in bank shares was triggered by Silicon Valley Bank (SVB), a major banking partner for the US tech sector, which was charged with new debt after selling a package of bonds at a loss to meet depositors’ demands for cash. was forced to raise capital.
“The market is treating this as a potential contagion risk,” said Antoine Bouvet, senior rates strategist at ING in London.
“It makes sense to me that even a remote possibility of a US banking system-wide crisis should come with a small possibility of contagion to Europe,” he said.
Already bruised, the sector could face further turmoil later on Friday if US jobs data points to a further rise in interest rates.
Shares of major US banks such as JPMorgan Chase & Co and Citigroup were set to fall again when Wall Street reopened.
SVB’s crisis underscored the risks for banks since the end of easy money. Banks typically invest heavily in government bonds, especially those of their home country. The rise in interest rates has led to a sell-off in bonds, leaving banks facing potential losses on the securities they hold.
John Cronin, an analyst at Goodbody, said investors were concerned about the falling value of banks’ investments and how this could affect their businesses reducing capital, with savers switching banks for better deals. .
Giving more deposits to attract customers can also reduce the bank’s profits.
Global borrowing costs rose at the fastest pace in decades over the past year as the Federal Reserve raised US rates by 450 basis points from nearly zero, while the European Central Bank hiked the euro zone by 300 bps.
Other parts of Europe and many developing economies have done even more. However, there are concerns that price inflation remains high, something that will lead to further rate hikes.
Neil Wilson, chief market analyst at Markets.com, said the SVB episode could be “the last straw” for banks following concerns about high interest rates and a fragile US economy.
“It is the leverage in the system that is the problem,” said James Athey, investment director at Aberdeen. “Monetary policy is way too easy for too long.”