European bank shares tumbled on Friday in the wake of a dramatic sell-off in US bank stocks amid widespread jitters about the sector’s vulnerability to rising money costs.
The global crash in bank stocks was prompted by Silicon Valley Bank, the main banking partner for the US technology sector, forced to raise fresh capital after losing $ 1.8 billion selling a package of bonds to meet the demand for cash.
Neil Wilson, Chief Market Analyst at Markets.com, said the episode could be the “straw that broke the camel’s back” for banks after concerns about higher interest rates and a fragile US 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 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 do not see a systemic threat to the global banking system, the negative effects for creditors of higher central bank interest rates have now been felt.
“It’s the impact on the system that’s the problem,” said James Athey, investment director at Abrdn. “Monetary policy was too easy for too long.”
Global borrowing costs have risen at their fastest rate in decades over the past year as the Federal Reserve lifted US rates by 450 basis points from near zero, while the European Central Bank raised the euro zone by 300 bps.
Other parts of Europe and many developing economies have done more. But there are concerns that if price inflation remains high, that will lead to further rate hikes.
The crisis at SVB underscores the vulnerability of banks, many of which were backed by trillions of dollars of taxpayer cash after the global financial crisis more than a decade ago.
John Cronin, analyst at Goodbody, said investors were worried about the decline in the value of the banks’ investment and how that can press the capital underpinning the business, as well as savers switching banks for a better deal.
Banks typically invest heavily in government bonds, especially in their home countries, making them vulnerable to falling prices.
Source: Reuters
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