Thursday, December 7, 2023

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

© Reuters. FILE PHOTO: A dealer sits in entrance of the pc screens at his desk on the Frankfurt inventory trade, Germany, June 29, 2015. . REUTERS/Ralph Orlowski

By Alun John, Marc Jones and John O’Donnell

LONDON/FRANKFURT (Reuters) – European financial institution shares tumbled on Friday within the wake of a dramatic sell-off in U.S. lenders as concern unfold that the sector might be weak to the rising value of cash.

Europe’s STOXX banking index fell greater than 4%, set for its largest one-day slide since early June, with declines for many main lenders, together with HSBC, down 4.5%, and Deutsche Financial institution (ETR:), down 7.9%. Shares in Italy’s UniCredit and Intesa Sanpaolo (OTC:) additionally fell sharply.

The worldwide rout in financial institution shares was prompted by Silicon Valley Financial institution (SVB), a serious banking associate for the U.S. tech sector, which was compelled to boost recent capital after promoting a bundle of bonds at a loss to fulfill depositor calls for for money.

“The market is treating this as a possible contagion danger,” mentioned Antoine Bouvet, senior charges strategist at ING in London.

“It is smart to me {that a} distant likelihood of a U.S. banking system-wide disaster must also include a small likelihood of contagion to Europe,” he mentioned.

Already bruised, the sector may face one other bout of turmoil in a while Friday if U.S. employment information factors to an extra racheting up of rates of interest.

Shares in main U.S. banks similar to JPMorgan Chase & Co (NYSE:) and Citigroup (NYSE:) had been set to fall once more when Wall Road reopens.

Europe’s battered banks


The disaster at SVB underscored the dangers to banks from the top of straightforward cash. Banks sometimes make investments closely in authorities bonds, specifically these of their house nation. A spike in rates of interest has led to a sell-off in bonds, leaving banks uncovered to potential losses on the securities they maintain.

John Cronin, an analyst at Goodbody, mentioned traders had been anxious concerning the falling worth of banks’ investments and the way that might hit the capital underpinning their enterprise, in addition to savers switching banks for a greater deal.

Providing larger deposits to draw prospects may additionally eat into financial institution income.

International borrowing prices have risen on the quickest tempo in many years over the past yr because the Federal Reserve lifted U.S. charges by 450 foundation factors from close to zero, whereas the European Central Financial institution hiked the euro zone’s by 300 bps.

Different elements of Europe and lots of creating economies have achieved much more. There are issues, nonetheless, that value inflation is staying excessive, one thing that might drive additional price hikes.

Neil Wilson, Chief Market Analyst at, mentioned that the SVB episode could possibly be the “straw that breaks the camel’s again” for banks after worries about ever larger rates of interest and a fragile U.S. economic system.

“It’s leverage within the system that’s the downside,” mentioned James Athey, funding director at Abrdn. “Financial coverage means too straightforward for means too lengthy.”

The race to boost charges

(Writing By John O’Donnell; Further reporting by Jo Mason, Marc Jones, Iain Withers and Yoruk Bahceli; Enhancing by Elisa Martinuzzi and Toby Chopra)

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