Europe’s banks have a diversified funding and liquidity profile, according to the European Banking Authority’s recently published risk dashboard.
As of the fourth-quarter of 2022, retail deposits — which tend to be stickier than other forms of funding — made up 47% of total available stable funding. Cash and reserves represented 56% of total liquid assets, with central government assets reaching 19.4%.
A downward trend in both ratios is expected due to upcoming repayments of the European Central Bank’s targeted longer-term refinancing operations. This is likely to drive funding costs higher for banks, independent from their funding instrument.
In early March, financial market volatility increased due to the confidence crisis involving Silicon Valley Bank and Credit Suisse. Lenders experienced a drop in share prices, higher yields and wider credit spreads. Banks’ share prices and credit spreads have partially recovered since then, but the rapid funding outflows at Credit Suisse highlight how banks can be vulnerable to a loss of market confidence.
The median European bank could, in theory, lose 38% of its deposits before facing significant risk to capital due to losses on its held-to-maturity securities or the sale of other illiquid assets, says financial services firm Jefferies.
Most of the large European banks have sound fundamentals to absorb pressure from monetary tightening and mitigate potential deposit volatility, according to credit agency Fitch.
