Euro zone bank supervisors see limited hit from SVB collapse

© Reuters. SVB (Silicon Valley Bank) logo and EU flag are seen in this illustration taken March 12, 2023. REUTERS/Dado Ruvic/Illustration

FRANKFURT (Reuters) -Euro zone supervisors see limited consequences for banks in the region from the collapse of two U.S. lenders, while stressing the need to watch any further spillover closely.

Investors were selling euro zone bank shares and reeling in their bets on interest rate increases by the European Central Bank after Silicon Valley Bank became the largest U.S. bank to fail since the global financial crisis of 2008, prompting U.S. authorities to step in.

But a senior European Central Bank supervisor said euro zone banks were well funded and more conservative than SVB, which mostly lent to tech startups, and New York-based rival Signature Bank (NASDAQ:SBNY), which was wound down at the weekend.

The source said supervisors saw no direct implication of the SVB collapse for euro zone banks but cautioned this could change if the fallout in the United States extended to bigger banks, raising the risk of contagion.

For now, however, the ECB's Supervisory Board, which oversees the euro zone's biggest bank, did not see the need to hold an emergency meeting, the source added.

Among national authorities, which are responsible for smaller banks, only Germany's Bundesbank had formally convened its crisis team.

This was created at the time of the last financial crisis and is tasked with informing the Bundesbank's board and making recommendations, but it doesn't have the power to take decisions.

Germany's financial regulator BaFin, which supervises German banks in cooperation with the Bundesbank, said it was imposing a moratorium on the German branch of SVB.

A spokesperson for the ECB declined to comment while a spokesperson for the Banque de France said it didn't have a crisis meeting in the works.

INVESTOR WORRY

Yet investors were worried, even calling into question the ECB's clearly telegraphed 50-basis-point hike this Thursday.

Money markets were now pricing in a 60% chance of the ECB raising rates by just 25 basis points, reflecting concern that market instability would get in the way of the central bank's fight against inflation.

An index of shares in euro zone banks had fallen by 7% by 1320 GMT, with Germany's Commerzbank (ETR:CBKG) down 15% and Spain's Sabadell down 10.7%.

The supervisory source added euro zone banks had done a good job of transferring assets from their trading books to their "hold-to-maturity" portfolio, meaning they didn't have to account for lower market prices as a result of rising interest rates.

Marco Troiano, a director at Scope Ratings, noted that euro zone supervisors applied the strictest liquidity requirements to all banks with more than 30 billion euros worth of assets while their U.S. peers set the threshold at 250 billion dollars.

Silicon Valley Bank, which suffered a bank run last week, had approximately $209 billion in total assets.

"The supervision of mid-sized banks in Europe is stronger, including on funding and liquidity," Troiano said. "There has not been a rollback of post-crisis regulations in Europe, unlike in the U.S.".

Morgan Stanley (NYSE:MS) analysts also estimated that euro zone banks wouldn't be forced to sell bonds at a loss thanks to their existing cash buffers.

French Finance Minister Bruno Le Maire said there was "no specific alert on the French banking system, which is solid" but he was "monitoring the situation".

The Italian finance ministry said it trusted European authorities would intervene "with the same timeliness" as their U.S. counterpart if needed.

There is a key difference however: the United States has a single deposit insurance scheme, which was activated on Monday to rescue SVB's customers, while each of the 20 countries that share the euro has its own and its capacity is ultimately constrained by each national government's ability to bail out its depositors.