The collapse of Silicon Valley Bank has shown technology makes bank runs easier. Panic may also spread more fluidly across the world thanks to electronic media. European banks sold off heavily in response to the SVB failure in the US. In Switzerland, Credit Suisse was forced to seek central bank support.
How risky are European banks, really? SVB failed because it did not hedge interest rate risks adequately. Its deposit base was concentrated and largely uninsured. In contrast, most European banks have diversified risks, and decent capital buffers. However, Lex calculations reveal a wide spectrum of strength and weakness.
Several indicators merit monitoring. A high concentration of flighty corporate deposits is one. Almost all of SVB’s deposits belonged to businesses. These represent up to 30 per cent of total liabilities for just a handful of European banks, according to S&P.
European lenders hold significant amounts of high-quality, easily-sold assets as a proportion of their deposits, no less than 20 per cent. That compares with just 6 per cent for SVB.
The Piotroski F-score is another way of assessing corporate risks. This combines such measures as profits, liquidity and efficiency. The scale ranges between nine (best) and zero (worst).
Lex tweaked the measure to include buffer capital and substitute pre-tax profits for gross profits. But it is fair to acknowledge some banks we approached saw the broader methodology as inappropriate.
The average score among 100 European banks is five, Lex calculates. Danske Bank of Denmark, which had a big settlement in 2022 for alleged money laundering via Estonia scored the lowest with a ranking of two. Credit Suisse scores three, but so does Scandinavia’s SEB, one of the best-capitalised banks in Europe.
Spain’s Sabadell, one of last year’s best-performing bank stocks, notched up a sub-par score of four. Its capital buffer is sensitive to interest rate shifts.
The SVB crisis has taught investors and watchdogs new lessons about bank risk. High capital buffers offer one line of defence. But the basics of managing assets and liabilities through interest rate cycles are equally important.
Clarification: Alpha Bank’s F-score of 2 was calculated using twelve-month figures prior to the release of full-year results on March 15. Recalculating the F-score using the latter numbers produces an improved figure of 6.