Europe’s banks are still at risk, regulator warns

By Mark Thompson and Julia Horowitz, CNN

Europe’s banks are not yet in the clear, a top EU regulator said Monday, two weeks after the collapse of Silicon Valley Bank in the United States unleashed turmoil in the global banking sector.

José Manuel Campa, the head of the European Banking Authority (EBA), told a German newspaper that European lenders remained vulnerable following the demise of SVB and the subsequent emergency rescue of Credit Suisse by UBS.

“The risks in the financial system remain very high,” he told Handelsblatt.

He added that rapidly rising interest rates were taking their toll.

“Such a dramatic change in interest rates not only increases the opportunities for banks to make money, but also the risks.”

The EBA is keeping a close eye on the issue of unrealized losses on bank balance sheets. Such losses on US Treasuries held by SVB — one consequence of a historic campaign by central banks to fight inflation by hiking borrowing costs — contributed to its failure.

The regulator is currently finalizing a study of the effects of interest rate risks on European banks, which it started working on in the fall.

“The investigation is not yet concluded, but I can say already today that we don’t expect to find major institutions with significant solvency risks arising from unrealized losses,” Campa said.

What next?

Still, regulators and investors are on edge about potential pockets of vulnerability in the banking sector.

SVB’s downfall was caused by a loss of confidence, which became a self-fulfilling prophecy as clients spread alarm on social media and yanked their cash from the bank.

Meanwhile, years of mismanagement and scandal at Credit Suisse left it particularly exposed to a broad sense of unease about banks. An eventual collapse in confidence among the lender’s investors and customers led to a hastily brokered sale to UBS, its larger Swiss competitor, as authorities became increasingly concerned it could fail and trigger a wider financial crisis.

The turmoil recently spread to Deutsche Bank, Germany’s biggest lender. Its shares fell sharply on Friday as investors worried it could be the next weakest link.

The bank has been a problem child for years. Over the past decade, it racked up billions of dollars in losses as it lagged bigger Wall Street rivals and paid the price of its own string of scandals. It has gone through several strategy changes, major restructurings and mass layoffs.

However, it has rebounded strongly under CEO Christian Sewing, reporting the highest annual pre-tax profit in 15 years last month.

— Anna Cooban contributed reporting.

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