March 18, 2023
While the financial contagion triggered by the bankruptcy of Silicon Valley Bank extends to European credit institutions, with the sector index losing 2.6% yesterday, Europe could find itself having to deal again with the difficulties of German banks. This time to creak are not the big giants like Deutsche Bank or Commerzbank, recapitalized by Berlin in 2009, but the savings banks (sparkasse) and cooperatives. These are local lenders which, despite their small size, account for more than half of the total loans granted in Italy Germany.
And which, above all, are not subject to the rigorous controls of the EU Supervisory Authority. If they were to start to give way, the effects on the banking system could be much more disruptive than those that have occurred in recent days following the difficulties of Credit Suisse, also due to the greater interconnections with the rest of the European economy. As emerges from an analysis by the US rating agency, Dbrs Morningstarin 2022 small German lenders suffered substantial write-downs in their bond portfolio. Exactly what happened to the Californian Svb. The mechanism at work is the same: the securities held, following the rise in interest rates, have depreciated, since they offer less attractive interest rates than newly issued bonds. by how much? According to Dbrs calculations on a bond portfolio of 284.8 billion eurosthe losses recorded, valuing the bonds at market values and not at historical cost, amounted to 7.9 billion for sparkassen (-2.8%) and 5.8 billion for cooperative banks.
The rating company’s exercise also focuses on the impact of write-downs on capital requirements. For savings banks, Tier 1 (the ratio between equity and risk-weighted assets) would drop from 15.7% actually recorded in 2022 to 14.8%, while for cooperatives from 15.3% to 14.4%. Not so much, sure. But, given the nervousness that reigns in recent days, it doesn’t take much to trigger the classic run on the banks. And in that case, the mass sale of securities to repay depositors would cause their prices to collapse.
It must be said that the analysts of the rating company point out that the 2022 results, inflated by the increase in the interest margin of 21 billion for savings banks and 17.7 billion for cooperatives, offset the depreciation of the bonds held. This has allowed local credit institutions, controlled by the regions and provinces, to “absorb devaluations while maintaining strong capital ratios”. However, earnings left something to be desired. In a golden year for banks around the world, which benefited from the substantial rate hikes launched by the monetary authorities, German banks reported disappointing results, even worse than in 2021. The adjusted net profits of savings banks amounted to 1.3 billion against the 5 billion of the previous year, while those of cooperatives at 3.1 billion, down compared to 5.7 in 2021. Furthermore, over time, the interest margin he gets thinner and thinner.
Deposit beta has so far been low, however, if competitive pressure to reprice deposits increases, write the DBRS analysts, the benefit of higher rates could fade. . Not only. Savings banks and cooperatives are particularly exposed to the “interest risk”: in other words, any rises or falls in interest rates can have very serious effects. This is because, according to the DBRS analysis, “long-term assets are financed with short-term liabilities and financial hedging strategies are not very widespread among small banks”.