Could Silicon Valley Bank collapse affect European banks? Experts say…

Bloomberg | | Posted by Lingamgunta Nirmitha Rao
Mar 13, 2023 02:35 PM IST

Previously, European regulators urged banks to keep a close eye on assets and liabilities in order to avoid losses from selling bonds to meet depositor demands.

The failure of Silicon Valley Bank isn’t a blueprint for similar issues at European lenders, which remain attractive for investors as interest rates rise, according to Deutsche Bank AG and Citigroup Inc.

Police officers leave Silicon Valley Bank's headquarters in Santa Clara, California. (File)(AFP)
Police officers leave Silicon Valley Bank's headquarters in Santa Clara, California. (File)(AFP)

Europe’s banks have more diverse sources of liquid funding, are able to win and retain deposits and they have stronger financial reserves than the US lender, analysts at the two firms said. There’s also less risk to capital if banks have to take losses on the sale of securities, the Citi analysts wrote in a note to clients late Sunday.

Also Read | HSBC buys UK arm of Silicon Valley Bank for 99, gets deposits worth US$ 8.1bn

The dramatic downfall of SVB, a California-based lender that billed itself as a one-stop shop for tech visionaries, sent shock waves around the world as startup founders worry about access to funding and investors question whether rising interest rates pose risks to banks elsewhere. European regulators previously urged banks to keep a close watch on assets and liabilities in order to prevent losses from selling bonds to meet the demands of depositors.

Also Read | Silicon Valley Bank collapse: What is a bailout and Bank Funding Term Program?

Unlike in the US, however, central banks were slower to tighten monetary policy and so banks are still awash in cheap funds. Regulation also helps, with European lenders being required to hold more high-quality liquid assets than they would expect to see flow out over 30 days of stress.

Only the largest US banks are held to similar rules and SVB was deemed to small, according to Citi analysts including Andrew Coombs. European banks also mainly hold such assets in cash and government bonds, with securities portfolios typically a smaller component, Citi said.

Most bond portfolios at European lenders are held to maturity “and hence are not exposed to interest rate risk,” Deutsche Bank analyst Benjamin Goy wrote in a note.

The Citi analysts also said they’re “not aware” of any European banks that rely as heavily on a small group of large depositors as SVB did, with its focus on large deposits from commercial clients such as early-stage technology and life science or health care companies.

“We think this is another test (and hopefully ultimately proof) that the European banks are much more resilient and not the weak link in the financial system this time,” Deutsche Bank said.

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