European bank shares have nose-dived in the last week in one of the worst performances for the financial sector since the onset of the Covid pandemic, the Financial Times has reported.
Following the collapse of the US tech-lender Silicon Valley Bank (SVB), bank stocks in the US, Europe and Japan have seen a collective loss in value of US$459bn so far in March, which is equivalent to a 16% decline, marking this the sharpest slump since March 2020.
US, European and Japan bank indices (March 2023)
- US: KBW Bank index is down 18%
- Europe: Stoxx 600 Bank Index is down 15%
- Japan: Topix Bank Index is down 9%
The collapse of SVB on 10 March was triggered by a fall in the value of long-dated Treasury bonds brought on by a hike in central bank interest rates.
SVB’s collapse followed the fall in the value of its long-dated Treasury bonds and underlined the unexpected consequences of long-awaited interest rate hikes.
Some commentators have noted that a pension crisis in the UK, following Kwasi Kwarteng’s mini-budget last October, was an early portent of today’s financial woes. At the time, a dramatic rise in interest rates on long-dated UK government bonds (gilts) triggered a tumble in the debt markets, putting the stability of the UK’s financial system at risk.
The Bank of England stemmed the fall by promising to buy up to £65bn in government debt, thereby averting a collapse in the value of funds held by pension fund managers, who would otherwise have been left holding funds with negative net asset value and unable to meet their cash paying obligations.
“Available for sale”
It is worth noting that European banks also hold large bond portfolios, the paper value of which has fallen due to interest rate rises over the last six months. A small portion of these bonds are not held to maturity but are deemed “available for sale”, meaning their value is adjusted at regular intervals.
The FT cited analysts saying that compared to 14% of “available for sale” investments at SVB and investments as a share of assets of 57%, European banks have 6% of assets “available for sale” and their total investments make up 18% of their total balance sheets.
European banks experienced a further fall in confidence following an 8% share price fall in Credit Suisse, even after the Swiss central bank stepped in with a $54bn emergency credit line. The Zurich-based lender’s bonds were trading at distressed levels, according to the FT.
The Credit Suisse fall has triggered a wider European bank stock sell-off, involving a number of prominent asset finance banks, including France’s BNP Paribas and Societe Generale; Spain’s BBVA; Germany’s Deutsche Bank and Commerzbank; and the Netherland’s ING Bank.