MILAN: The average European bank could withstand a loss of 38% of its deposits without having to sell at a loss government bond holdings or have a fire sale of illiquid assets, Jefferies analysts say.
The collapse of Silicon Valley Bank after deposit withdrawals that forced the US regional lender to sell Treasury bonds at a loss has focused investors’ attention on the potential losses banks face on their government bond holdings.
“Following the unravelling of several US regional banks and the announced rescue merger of Credit Suisse into UBS, investors have scrambled to find weak links in the system,” Jefferies said in an analysis of bank liquidity.
“Most investor discussions end up at deposit flight risk and the extent to which this can be offset,” it added.
Rising interest rates have pushed down the market price of government bonds, but banks do not need to reflect that for the sovereign holdings which they intend to hold to maturity (HTM). This saves them from taking a hit to their capital reserves.
But investors are worried about the risk that banks may at some point be forced to sell their HTM securities.
Jefferies calculated that the median European bank could lose in theory 38% of its deposits before facing significant risk to capital due to losses on its HTM securities or the sale of other illiquid assets.
Jefferies analysed the ability of banks to quickly cover deposit outflows with minimal or no losses. — Reuters