FRANKFURT, May 10 (Xinhua) -- Europe's banking stocks were still struggling this week as investors believed that the U.S. banking crisis is far from over.
U.S. BANKS' DISTRESS WEIGHS ON EUROPEAN ONES
The Euro Stoxx Banks index, which offers exposure to more than 20 major banks across Europe, traded at around 102 late on May 10, which was still over 14 percent below its March 6 level, when news about the U.S. Silicon Valley Bank (SVB) running into trouble broke out, showing that the distress of U.S. banks continues to weigh on the European banking sector.
After the bankruptcy of several U.S. banks and the emergency sale of Credit Suisse, the German financial regulator BaFin is preparing for continued turbulence on the financial market.
"It is not certain that this difficult phase -- this real-time stress test -- is behind us," BaFin President Mark Branson said on Tuesday in Frankfurt.
Responding to a question last Thursday, European Central Bank (ECB) Vice President Luis de Guindos explained that Europe's banks are resilient thanks to their levels of capital, liquidity and quality of liquid assets.
"But I think that it is quite clear that there is no space for complacency," he said, acknowledging that bank runs can happen really fast.
As panic set in when speculations swirled online that SVB was in trouble, customers swarmed into the bank and withdrew 42 billion U.S. dollars in a single day. Within a few days, the bank collapsed as a result.
"This shock to stickiness (of bank deposits) led to deposits fleeing Silicon Valley Bank at a pace eight times the fastest run in the 2008 financial crisis, fatally wounded First Republic (Bank) and, for a period, destabilized the entire U.S. regional banking system," Krishna Guha, vice chairman of Evercore ISI, an investment banking advisory company, wrote in a Financial Times op-ed.
The San Francisco-based First Republic Bank fell victim to a bank run and was taken over by JP Morgan recently.
U.S. HIKING INTEREST RATES BLAMED FOR CROSS-ATLANTIC CRISIS
Banks in the U.S., especially regional ones, are under stress as their health is called into question at a time when the Federal Reserve has been hiking interest rates relentlessly.
Shares of PacWest Bancorp, a Los Angeles-based regional bank, tumbled last Thursday, plunging for a time by nearly 60 percent amid speculations of the sale of the bank.
Bank stocks in the U.S. have been sliding more or less recently, a sign that the regional banks' crisis is expanding.
The spillover of the banking crisis shook the banking industry across the Atlantic with Swiss lender Credit Suisse being bailed out and Deutsche Bank's stocks tumbling.
"Credit Suisse, Deutsche Bank and Silicon Valley Bank are not the root of the banking issue," Spanish economist Daniel Lacalle said in a post published in March. "These are the symptoms."
In the years when the central banks were keeping interest rates at ultra-low levels, European banks bolstered their balance sheets in order to be profitable, he explained.
As U.S. banks are scrambling with unrealized losses on assets acquired earlier when interests go much higher, European banks hold a lot of fixed-rate mortgages.
U.S. ROLL-BACK OF REGULATIONS LED TO BANK CRISIS
In the wake of the financial crisis in 2008, regulations were put in place on financial institutions, which were aimed at boosting their capital and other safety measures to weather potential financial distress in the future. However, the U.S. regulators in 2018 rolled back regulations on banks, raising the threshold of banks that are obliged to follow the regulations to 250 billion U.S. dollars in assets.
The rollback is widely blamed for the collapse of small banks like SVB, which failed to hedge against interest rate hikes.
De Guindos noted that the U.S. banks going through difficulties are medium-sized, regional and they share very concrete and very idiosyncratic business models. They are quite open to interest rate risks -- they are vulnerable to an increase in yields, he said.
According to researchers at Metzler Asset Management's Sustainable Investment Office, who compared the management quality of 179 listed U.S. banks with those of 47 listed European banks, the U.S. institutions show much more weaknesses than their European competitors. This also applies to many of the troubled U.S. regional banks, such as PacWest.
Experts believe that the accumulation of institutional management deficits in the U.S. is related to the differences between the Federal Reserve and the ECB in banking supervision.
Metzler's experts said that it is far more common in the U.S. for banks' board members to lack significant expertise in risk management.
The U.S. Federal Reserve has also acknowledged that there were shortcomings in the supervision of the SVB.
Unlike in Europe, the U.S. does not have relatively uniform standards for the supervision of small and large banks, according to a PwC regulation expert.
