June 14, 2024

What does the collapse of the Silicon Valley bank mean for Europe?

The Silicon Valley bank collapse is not typical of a similar crisis in European banks. This is what analysts at Deutsche Bank and Citigroup wrote. Banks in Europe benefit from the fact that interest rates are not as high as in the United States.

European banks are more diversified in financing, better able to attract and retain deposits and have larger financial reserves than the failing US institution. The risk of capital losses due to the forced sale of securities is also lower. This is the assessment made by experts at Deutsche Bank and Citigroup after the collapse of Silicon Valley Bank (SVB) in the United States.

The dramatic demise of SVB in California sent shock waves around the world. Investors are wondering where interest rate risks from tightening monetary policy can still be felt. The continent’s regulator has previously urged institutions to closely monitor the conditions of their balance sheets.

In Germany, the issuance of losses on bonds in the bank book had an above-average impact on savings banks and cooperative banks in particular. Mark Branson, head of Baffin Bank, had already identified “increasing pressures – at least in the short term” weeks ago, and the Bundesbank also warned in its financial stability report. Of course, there are not only similarities here, but also differences, for example with regard to the most diverse deposits.

How many bonds do banks have on their books?

Unlike the US, the European Central Bank has been raising interest rates more slowly, leaving banks with plenty of cheap financing. European banks also have to hold more liquidity than they would lose in the 30-day stress scenario. Those rules only apply to the largest banks in the US — not, say, a Silicon Valley bank, notes Citi’s Andrew Combs.

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Citi also noted that Silicon Valley Bank was relying heavily on a small group of large depositors in technology and life sciences. You are not aware of any bank in Europe with this privacy.

“We believe this is another (and hopefully ultimately) test that European banks are more resilient, and this time they are not the weak link in the financial system,” Deutsche Bank wrote.

However, this did not help European bank stocks Monday morning. The Stoxx 600 Banks Index fell more than 4%, as deposit-oriented banks such as Bawag in Austria, Commerzbank, and Spanish banks suffered badly.

HSBC buys a Silicon Valley bank branch for £1

HSBC Holdings Plc has bought the UK subsidiary of Silicon Valley Bank. This ends a frantic weekend in which the government and bankers searched for options to avoid the collapse of the SVB subsidiary. The British division of HSBC pays the bank a symbolic sum of one pound.

Silicon Valley Bank plays a major role in the startup scene

“This acquisition makes very good strategic sense for our UK business,” HSBC Chief Executive Noel Cowen said in the statement. “SVB UK customers can continue with their banking as normal, safe in the knowledge that their deposits are protected by the strength and security of HSBC.”

While relatively small in the UK, SVB plays a huge role in the startup world, describing itself as “the banking partner of choice for founders, entrepreneurs and investors”.

Executives from about 180 tech companies warned in an open letter to Treasury Secretary Jeremy Hunt that losing deposits in SVB could cripple the sector and send it back 20 years.

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The ECB sees no reason for crisis meetings

In Germany, SVB is represented by only one branch with a balance sheet of around 790 million euros. Her clients include HelloFresh and Lilium. “The Silicon Valley branch of Bank in Germany has no systemic relevance,” Baffin said. The IRS ordered customer traffic to be closed. There are no consequences for deposit insurance. The German Startup Association expressed cautious optimism that domestic companies could get away with it.

A senior insider said the European Central Bank (ECB), which oversees 111 major banks in the eurozone, sees no reason to hold an emergency meeting. In general, banks in the eurozone are well equipped financially. They’ve done a good job of transferring the assets from their trading books into their portfolio of held-to-maturity investments. This means that they are better protected against higher interest rates and lower prices. In addition, financial institutions in the twenty-country community have a more conservative mix of their assets than SVB.

Despite the measures taken by the authorities, investors are worried about the consequences of SVB’s bankruptcy. The European stock index fell 4.7 percent, and the financial services companies index lost 3.3 percent.