Analysis: Reforms soften blow of Europe's banking crisis but risks remain

(Xinhua) 14:42, March 25, 2023

ROME, March 24 (Xinhua) -- Financial sector reforms put into place in the wake of the global financial crisis 15 years ago have so far helped protect European banks from being hit harder by the ongoing banking crisis, analysts said. But the latest round of problems have still not fully run their course.

European stock markets have just ended their second consecutive week of high volatility. On Friday, the week's final session, shares were mostly lower, with the blue-chip indexes in Paris and Frankfurt down 1.7 percent each, while in Milan shares slipped by 2.2 percent, and in Amsterdam they retreated by 1.6 percent.

Over the past ten sessions, European shares broadly fell seven times, with banking sector stocks the main reason for the ups and downs.

The current banking sector fragility was sparked by the collapse of two regional banks in the United States -- Silicon Valley Bank in California and New York's Signature Bank. Soon after, Switzerland's Credit Suisse shed nearly a quarter of its value in one day, March 15.

But markets were called earlier this week when UBS, Credit Suisse's main rival, acquired the troubled lender for around 3 billion U.S. dollars.

According to Lorenzo Rocco from the Department of Economics and Management at the University of Padova, it is unlikely that Credit Suisse will be the last large European bank to fall under pressure during the current crisis.

"We might still see large consequences for other banks," Rocco told Xinhua. "All banks these days are interconnected and ... the more the waves spread across the banking sector the more we could see trouble."

Andrea Giuricin, a professor of finance and mobility management at Bicocca University in Milan, pointed out that the current situation is the latest in a series of crises, including the global crisis of 2008-2009 sparked by the collapse of U.S.-based giant Lehman Brothers and regional crunches like the one in 2012-2013 that had wide-ranging impacts on Spanish banks. The coronavirus pandemic also had big impacts on financial institutions.

"Europe already had big problems with its banks," Giuricin told Xinhua.

But both Rocco and Giuricin said that reforms put in place over the past decade and a half are paying dividends this time around.

"At the European level we now have a system that's a little stricter than it had been," Giuricin said. "There are still risks for the weaker banks, and tension is still there. But now we've been through rounds of consolidation that resulted in bigger banks acquiring smaller and more vulnerable banks. Banks are required to have more liquidity than they did before, and the internal capital for banks is higher."

Rocco agreed, adding that since top-tier banks cannot hold the bonds of other top-tier banks, that reduces the risk of contagion through the sector.

Rocco also said the current crisis is furthering the kind of consolidation the sector has been going through.

"UBS made the deal of a lifetime when it acquired Credit Suisse," he said. "They paid 3 billion U.S. dollars for a bank that had been worth 8 billion U.S. dollars just before, so they paid less than half price, and they did it with a guarantee of the Swiss Central Bank, and while doing it they basically eliminated their largest competitor."

(Web editor: Cai Hairuo, Liu Ning)


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