A solid balance sheet structure will help European banks buffer stressed market conditions following the collapse of their US peers Silicon Valley Bank, Signature Bank and Silvergate Bank, credit agency Moody’s said.
Bank failures typically point to broader implications for the financial sector. However, Moody’s noted “key differences in monetary policy and deposit dynamics” between Europe and the US. European banks are unlikely to find themselves compelled to liquidate their bond holdings at a loss like their SVB, the US ratings agency said in a sector comment note.
“A critical difference between the European and US systems, which will limit the impact across the Atlantic, is that European banks› bond holdings are lower and their deposits more stable, having grown less rapidly,” Moody’s said.
‘Less exposure to market risk’
“European banks have less exposure to market risk on bonds, despite a similar rise on yields on the five-year benchmark from 2020 lows,” it said. Moody’s also noted “strong cash balances” at European banks, at 16%, which means they are less likely to be forced to sell securities at a loss.
Although rising interest rates have hit the value of bond portfolios also for European banks, the market value of these bonds will converge with their nominal value as they approach maturity, Moody’s said, referring to an effect known as ‘pull-to-par’.
Nevertheless, Moody’s cautioned that the full effects of monetary tightening are yet to become apparent.
‘Full tightening effects may yet lie ahead’
“These critical differences do not make European issuers invulnerable. When confidence is punctured, contagion can be rapid. Banks’ balance sheets are by definition leveraged, run maturity mismatches and are often complex and opaque, with interlinkages and exposures that are often only known after the event,” the Moody’s note said.
“In addition, the ECB likely has further to run in its tightening cycle than the Federal Reserve, and although close to half of the TLTRO has now been repaid, this leaves €1.2 trillion outstanding that has to be withdrawn. So the full effects of monetary tightening may yet lie ahead.”
US deposit inflows turned negative
