Analysis: Turbulence reverses European bank prices after long rally

  • War, energy crisis and inflation weigh on borrowers
  • Chief regulator warns European banks of perils
  • Following the official financial stability threat warning

FRANKFURT, Oct 5 (Reuters) – Market turmoil has raised alarm over how banks will cope, with regulators warning they could repeat some of the mistakes that led to the financial crisis a while ago more than ten years.

Watchdogs fear that recent sharp swings in asset prices could add to the pressure on banks in the region stemming from Russia’s invasion of Ukraine, a worsening energy crisis, rising inflation and deteriorating economic prospects.

This nervousness was also evident in all markets.

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Some investors panicked last Friday, sending the pound and UK government bonds into a tailspin after the government announced plans to cut taxes and pay with heavy borrowing.

And this week, Credit Suisse saw its shares tumble and the cost of default insurance jump amid concerns over the turnaround of Switzerland’s second-largest bank as it prepares a restructuring plan after a series of setbacks. and losses.

Credit Suisse said this week it was staying close to clients as part of its strategic review.

European Central Bank (ECB) supervisor Andrea Enria has highlighted financial market volatility and the impact of rising prices and interest rates on heavily indebted businesses and consumers, warning banks of the perils .

He even blamed some for misplaced optimism, saying that “the Russian invasion of Ukraine is turning into a persistent and full-fledged macroeconomic shock.”

Enria highlighted the risk that loans will not be repaid and that a repeat of the government support that prevented this from happening during the pandemic was now less likely, urging banks to take it seriously.

TOO OPTIMISTIC?

Enria’s remarks follow a rare official warning from the European Systemic Risk Board, a risk watchdog, of threats to financial stability or the functioning of the monetary system that foundered in the crash a year ago. is over ten years old.

He highlighted risks, including rising energy prices hurting borrowers’ ability to repay, volatility in energy markets “putting pressure” on traders, and falling electricity prices. real estate – mortgages are the core business of many banks.

Many regulators, however, fear their warnings will be ignored.

ECB Vice President Luis de Guindos recently pointed to risks in the housing market and growing debt, calling for tighter controls on bank capital before loans go unpaid.

Earlier, he warned that investors were being too optimistic, pointing out that some believed companies would still be able to repay even risky loans despite the downturn.

These threats have also been highlighted in discussions between European regulators and the banks under their supervision.

Earlier this year, the ECB wrote to banks, telling them to cut lending to the most indebted borrowers.

Leveraged transactions rose to around 500 billion euros on the books of the 28 largest lenders in the euro zone, from 300 billion euros in 2018, as banks seek riskier returns.

The banks have now responded, explaining how they control the risk of this business.

But Enria’s comments suggest that not all banks have learned from past mistakes.

He pointed to “an increasingly optimistic attitude…which is generating a certain reluctance on the part of banks to seriously engage in prudential discussions on…the risks”.

Market jitters look set to continue.

US stock market volatility, as measured by the VIX “fear index” (.VIX), is well above the 30-year average, although well below pandemic and financial crisis highs.

The cost of insuring against a Credit Suisse default rose to 355 basis points on Monday and was at 308 basis points on Wednesday, from 57 basis points at the start of the year, according to data from S&P Global.

Santander (SAN.MC) chief executive Jose Antonio Alvarez said on Tuesday that liquidity in the banking sector was “extraordinarily high” and that he saw no contagion risks when asked about the Credit Swiss.

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As concerns grow, investors voted with their feet.

An index of European bank stocks has fallen 22% year-to-date, leaving it trading at a 40% discount to the value of banks’ assets.

But Karel Lannoo of the Brussels-based think tank the Center for European Policy Studies said banks are much safer now than they were in the past.

“With bank stock valuations where they are, the bad news is already priced in,” Lannoo said.

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Additional reporting by Dhara Ranasinghe; Written by John O’Donnell; Editing by Alexander Smith

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