A fund failure in Europe could have a far greater impact than in the US and take longer to resolve
Recent worries about the US banking system, triggered by the crisis of Silicon Valley Bankand subsequently of the Signature Bank and of Silvergate Bank, have now also extended to Europe. Just look at the Stoxx 600 Banks index, which fell 18% in one week. This figure reflects the tense state of the markets and bears witness to the unique importance that banks have for economies.
However, the European banking system has a number of key differences from the US, both positively and negatively. The failure of a large bank, for example, is less likely in Europe, thanks to the high level of capital, the stricter regulations and the series of stress tests that institutions are subjected to by the authorities. On the other hand, although unlikely, a failure of the sector in Europe could have a much greater impact than the United States and take longer to fix.
GOOD: It has been just ten years since the end of the European debt crisis, followed by the introduction of a new regulatory framework and the crisis management at regional level by the European Banking Authority and the European Stability Mechanism. Furthermore, European banks generally have higher levels of capital and liquidity than their counterparts United States, and follow stricter regulations that mandate an asset level starting at $50 billion, compared to $250 billion in the United States. The European banking market is also more established than the US, albeit with clear exceptions, such as Germany.
BAD: Less positive is the impact of the possible failure of a large bank. The share of bank lending in European economies is much higher than in the United States. Banks are the source of most corporate lending in Europe, while US companies much prefer to go to the bond market. Despite the efforts made in the last decade, the sector’s supervisory system is more fragmented and complex among the 27 EU Member States. Compared to the United States, the system is more complex and more time consuming; they range from the nationwide deposit insurance system to cumbersome bank work-out schemes.
Global Markets strategist at eToro*
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