EU Banking Sector: Risks from Unrealised Losses Appear Manageable, but Challenges Remain

DBRS Morningstar released a commentary of the implications of SVB´s failure for EU Bank. Summary highlights from the commentary include:

• The failures of SVB Financial Group and Signature Bank (both unrated by DBRS Morningstar) have triggered significant global market volatility, including in Europe.

• We consider that some of SVB’s problems that led to its failure were idiosyncratic and are not present to the same extent within the EU banking system.

• There are significant differences between EU banks and SVB. EU banks have a lower exposure to fixed income securities, more stable deposit bases, a regulatory framework that includes tighter interest rate risk management policies even for smaller banks.

• Nevertheless, we are closely monitoring EU banks’ liquidity positions as well as their exposure to fixed income securities. In order to do that, we have also carried out a theoretical exercise to haircut EU banks’ Amortised Cost portfolios. Under this theoretical exercise the capital impact seems manageable for EU banks.

“DBRS Morningstar considers that EU banks' unrealised losses in their bond portfolios are not a source of systemic instability. However, the full impact of the current financial instability is still to be seen” said Pablo Manzano, Vice President from the DBRS Morningstar Global Financial Group team. “The recent failures show us that bank runs and liquidity crises can unfold at a speed unseen before.” said Maria Rivas, Senior Vice President from the DBRS Morningstar Global Financial Group team. “Further tools to address liquidity crises are needed, and this recent experience might a very valuable input for the current revision of the EU bank crisis management and deposit insurance framework.”