DBRS says EU banking sector has few risks with potential losses on government debt

DBRS Morningstar published a commentary on the implications of the SVB’s failure for the EU Bank. Summary highlights of the commentary include that the failures of SVB Financial Group and Signature Bank (both not rated by DBRS) triggered significant global market volatility, including in Europe.

“We consider that some of the problems of Silicon Valley Bank that led to its failure were idiosyncratic and are not present to the same extent within the EU banking system”, says the rating agency.

“There are significant differences between EU banks and Silicon Valley Bank. EU banks have lower exposure to fixed income securities, more stable deposit bases, a regulatory framework that includes stricter interest rate risk management policies for even the smallest banks,” notes DBRS.

However, they warn, “we are closely monitoring the liquidity positions of EU banks, as well as their exposure to fixed income securities (bonds). To do so, we also carried out a theoretical exercise which consisted of applying a haircut to the amortized cost portfolios of European Union banks. Within the scope of this theoretical exercise, the impact of capital seems manageable for European banks”.

DBRS Morningstar “considers that unrealized losses (potential losses) of EU banks on their bond portfolios are not a source of systemic instability” in Europe. However, “the full impact of the current financial instability remains to be seen” says Pablo Manzano, Vice President of the DBRS Morningstar Global Financial Group team.

“The recent failures show us that banking and liquidity crises can unfold at a speed never seen before,” said Maria Rivas, Senior Vice President of the DBRS Morningstar Global Financial Group team. “More tools are needed to tackle liquidity crises, and this recent experience could be a very valuable input to the current review of the EU banking and deposit insurance crisis management framework”.