Why Europe reckons it is immune to SVB contagion
Today, our Brussels bureau chief parses confident statements that the US banking chaos won’t spread to Europe, and I explain why calls for a new Russia sanctions package face stiff resistance.
Not our problem
Eurozone policymakers were at pains to drum home one clear message last night: the EU’s banks are very different beasts from US regional banks that are currently at the centre of a crash in investor confidence.
The question, writes Sam Fleming, is whether the markets agree.
Paschal Donohoe, the eurogroup president, repeatedly stressed that the situation in Europe was “very, very different” from that in the US.
Banks in the region have no direct exposure to failed Californian lender Silicon Valley Bank, he said, insisting euro-area lenders enjoy abundant liquidity levels and are meticulously supervised according to Basel standards.
“The problems arise from the specific business model of the Silicon Valley Bank, and the picture here in Europe is very different,” he said. “Our banks are overall in good shape.”
The confident assessment that there is no reason for transatlantic contagion from the failure of SVB and the closure of Signature Bank was also shared behind closed doors.
But it remains to be seen if investors draw the same conclusions. Some European lenders’ share prices saw double-digit declines yesterday, including Spain’s Banco Sabadell and Commerzbank of Germany, as the Stoxx banking index lost 7 per cent. It was the worst day for European banking stocks in more than a year.
The meltdown has underscored the risks in the financial system as central banks rapidly lift borrowing costs to tame inflation. Banks that face big losses on portfolios of government bonds due to higher rates or those with a hefty share of uninsured deposits (like SVB) will come under scrutiny.
Even if the eurogroup’s confidence proves well placed, that hardly means there are no policy consequences from the events. The obvious one will be seen on Thursday, when the European Central Bank next sets rates.
While analysts expect president Christine Lagarde to go ahead with a previously planned half-point rate rise, the central bank may be more non-committal on its policy intentions thereafter, given the financial stability risks clouding the outlook.
The events in California may feel very distant, but chaos in the US financial system rarely remains a local matter.