Global | Turbulence in the banking system

This year had started off very well for banks. In fact, the share price of banks in the eurozone had risen by 20% by Wednesday, March 8; however, in one week these gains have been wiped out. The failure of three banks in the US and the sale of Credit Suisse to UBS have caused turbulence in the global banking system.

Key points

• Key points:
• The failed US banks had a unique business model and did a terrible job of managing structural risks—liquidity and interest rates—leaving them completely vulnerable to outflows of deposits. In addition to being highly volatile, these deposits were from companies in the venture capital and Fintech sectors, many of them startups, whose deposits were not covered by the US Deposit Guarantee Scheme in a substantial proportion (more than 90%).
• European banks are, naturally, suffering from market sentiment contagion, which is exacerbated by the recent takeover of Credit Suisse by UBS, but the banks’ fundamentals have not changed in the last week and remain positive.
• For the four main banking systems in the eurozone, liquidity deposited with the European Central Bank (ECB) amounts to more than 9% of their assets and exceeds the total volume of corporate deposits (a priori considered more volatile).
• Thus, while American banks have invested the excess deposits generated during the pandemic in long-dated bonds, European banks have left them, in part, deposited at the ECB. Secondly, household deposits (more stable) represent approximately 75% of all household and corporate deposits.
• Lastly, eurozone banks have access to ECB funding for a period of 3 months, while US banks, prior to last week, only had access to daily liquidity.

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