The health of the banking sector largely depends on trust. This week, the 10 largest European banks have lost over 50 billion euros in market capitalization, equivalent to the entire value of Banco Santander. Hit by the bankruptcy of Silicon Valley Bank and the subsequent crisis of Credit Suisse, the major banks in Europe have lost all the progress they had made since the beginning of the year: the Eurostoxx Banks index, which includes the largest financial entities in the eurozone, dropped more than 2.7% on Friday and 13.4% for the week. Stock prices have plummeted across the sector, with Santander losing over 10% in a week, BBVA facing a loss of around 6 billion euros, and other banks like BNP and ING also suffering significant declines in market capitalization.
The banking sector experienced a rollercoaster of emotions this past week. The collapse of Silicon Valley Bank on Friday set off financial alarms and dragged down stock prices, only to be somewhat mitigated by Washington’s announcement on Sunday that all deposits in the failed bank would be covered. However, markets took time to absorb this message, leading to losses on Monday. On Wednesday, the Saudi National Bank, a major shareholder of Credit Suisse, decided not to inject any more capital into the bank, causing a 24% drop in Credit Suisse’s shares and affecting the entire sector. The Credit Suisse then announced a billion-dollar loan from the Swiss National Bank to boost its liquidity, and the European Central Bank continued its path of raising interest rates and attempting to reassure the markets.
Despite efforts to restore confidence in European banks, the sector’s mood remained unstable throughout the week. The issue lies in the fact that trust cannot be bought, and signals from various financial sources have been mixed. While ECB President Lagarde tried to calm nerves, reports from Reuters that the ECB’s Vice President, Luis de Guindos, had warned Eurozone ministers of potential risks in their countries’ banks did not sit well with investors. A surprise meeting of the ECB on Friday to address the financial turmoil was perceived as another sign of instability, despite attempts to convey reassurance.
The analyst at Renta 4 bank, Nuria Álvarez, notes that Credit Suisse has significantly shaken confidence in the European financial sector, making it challenging to regain trust. No bank can withstand a massive withdrawal of deposits, as their business relies on taking in deposits and lending them out. If the market loses confidence and customers start withdrawing their funds, the bank’s operations are jeopardized. With a systemic bank on the verge of disaster, the market will closely monitor the ECB’s actions moving forward, as their decisions regarding interest rate hikes may either worsen the crisis or impact banks’ margins.
The situation remains uncertain for European banks, and the ECB’s task has become more complicated amidst the current financial turmoil. The market’s interpretation of their actions, whether raising or not raising interest rates, will have significant implications for the banking sector. As the crisis unfolds, the sector faces challenges in rebuilding trust and stability, with the market closely observing the developments in the coming days.
