(Finance) – The problems of SVB Financial Group, which led to its bankruptcy, are not present to the same extent within the banking system of the European Union. In particular, the banks of the Old Continent generally have alower exposure to fixed income securitiesbases of retail deposit more stable and a regulatory framework which includes tighter interest rate risk management policies even for the smallest banks. This was stated by DBRS Morningstar in a new report on the subject.
“DBRS Morningstar believes that the unrealized losses of EU banks in their bond portfolios are not a source of systemic instability. However, the full impact of the current financial instability remains to be seen,” said Pablo Manzano, Vice President of the Global Financial team.
However, the analysis points out that changes in interest rates are creating challenges for banks and are needed closely monitor liquidity positions of EU banks, as well as their exposure to fixed income securities.
“Recent bankruptcies show us that bank runs and liquidity crises can develop at a speed never seen before – said Maria Rivas, from the Global Financial team – More tools are needed to deal with liquidity crises and this recent experience could provide a very valuable input for the current review of the EU framework for banking crisis management and the deposit insurance”.
Analyzing the support of the Swiss authorities a Credit Suissewith a CHF 50 billion liquidity initiation, DBRS Morningstar says it does not expect similar measures to be necessary for other European banks, as the Credit Suisse was already facing ongoing specific compliance and restructuring challenges for his franchise, all of which has been heightened by the current market volatility.
Compared to SVB Financial Group, “in Europe, banks have a smaller share of debt securities and the mark to market is not reflected in the capital ratios”. These securities – accounted for at their Amortized Cost (AC) – range on average from 18% of total assets (in the case of Italian banks) to almost 0% (in Finland, Sweden and the Netherlands), according to data as of the end of June 2022.
Furthermore, analysts do not expect EU banks to post these significant unrealized losses for two main reasons. First, unlike SVB, le EU banks do not need to sell their bond portfolios to reposition their balance sheets in order to increase the sensitivity of assets to interest rates. EU banks have larger loan books (55% of assets versus 35% in the case of SVB) and these are already being repriced (since a large percentage are floating rate loans).
Second, the EU banks’ overall deposit bases are stronger than those of the SVB. EU banks have one much higher percentage of retail deposits, compared to SVB which mainly had corporate deposits. Financing from retail deposits is generally cheaper and stickierenabling a bank to better withstand liquidity crises.