A more diverse client base shields eurozone banks from problems similar to those faced by the American Silicon Valley Bank, but higher interest rates require “appropriate” identification of loan collection issues, explained the head of the supervisory mechanism Andrea Enria.
SVB encountered problems due to mass withdrawals of deposits triggered by its failed attempt to cover losses on its portfolio of government bonds.
The bank recorded strong deposit growth in 2021, investing the money in government bonds. Problems arose after the U.S. central bank halted its government bond purchase program in 2022 and began sharply raising interest rates, which reduced bond prices.
It is not possible to draw direct conclusions about systemically important banks in the eurozone from events in the U.S., asserted the head of the ECB’s banking supervision mechanism Andrea Enria on Tuesday afternoon in the European Parliament.
The banks monitored by the ECB are not extremely exposed to interest rate risk and do not rely heavily on a “concentrated, uninsured deposit base,” which we could call the “business model of SVB,” explained Enria.
The American bank directed its loans to financial companies specialized in supporting new companies, as well as to fintech companies and startups, and operated with their deposits, while banks in the eurozone generally work with a more diverse client base, he explained.
“More than 80 percent of SVB’s deposit base consisted of uninsured corporate deposits, which are more mobile than other types of deposits. Most of the bank’s assets consisted of fixed-income securities, which typically lose value when interest rates rise,” added Enria.
Both the U.S. central bank and the ECB are raising interest rates, and Enria acknowledged that “the current sharp increase in interest rates raises the exposure of eurozone banks to interest rate risk.”
Therefore, in analyzing risk management mechanisms, we encouraged banks to, among other things, improve asset testing models to appropriately reflect issues with loan repayment and deposit withdrawals, noted Enria.
Banks will earn more due to higher interest rates as their interest income will increase to offset higher costs arising from difficult loan collections, he added.
He also commented on the decline in bank stocks due to problems at Swiss Credit Suisse, which was taken over by larger competitor UBS last weekend, with mediation and significant financial support from the Swiss central bank and government.
“Although bank stock prices in the eurozone have fallen sharply, their funding and liquidity positions have not been significantly affected, reflecting the sector’s resilience,” said Enria.
