After days of U.S. banks being at the forefront of investor concerns, European financials are now leading the global market volatility, extending the recent concerns around the health of the banking system to Europe.
- The European bank selloff was triggered by Credit Suisse (CS) when a large shareholder indicated they would not be adding to their position in the troubled bank. Even though these comments were specific to CS, which has been struggling for a few years due to its unique management and strategy challenges, they exacerbated the currently weak market sentiment surrounding the banking sector in general, ensnaring other European banks as well.
- While the situation at CS seems to be idiosyncratic and not reflective of the broader European bank sector, the widespread selloff in European banks is illustrative of the current risk-off environment and the prospect for further volatility across global markets.
- In response, the Swiss National Bank provided a liquidity line to CS overnight to help stabilize the company.
Even though CS has been acting as a “slow moving train wreck” with its own unique strategic challenges for the past several years, its latest headlines sent European financials tumbling across the region on contagion fears. This broader selloff in European financials is indicative of the current fragile sentiment across global markets, especially for banks as they manage through the unfolding fallout of the unprecedented rapid rise in sovereign bond yields, leading to weaker portfolios and fleeing deposits.
In such periods of stress, markets tend to gyrate back and forth on every development. For example, news of another European bank withdrawing swap line support for CS sent the sector and market lower, only to rebound off the lows on news that the Swiss National Bank provided a liquidity line to help stabilize the firm. While the panic in the financial sector is resurfacing fears of the 2007-2008 financial crisis, it is notable that regulators have some muscle memory and appear to be acting more decisively in response to the unfolding threats to the financial sector.
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Chart illustrates the cumulative return indexes comparing European financials to U.S. financial sector indexed at 100 as of 1/2/2023. Both sectors are flat to somewhat higher (European peaking around 116 the first week in March and the U.S. sector at around 105 at the same point, with both falling off to 100 for European and about 93 for U.S. financial sector as of March 15, 2023.