Maybe it was too good to be true: recently it looked as if the turnaround in interest rates would almost exclusively benefit the banks, especially the European ones. After years of measly profits, many financial institutions suddenly made record profits again in 2022 – or at least the highest profits in more than ten years. Concerns that war, inflation and the energy crisis could even trigger a new financial crisis seemed almost forgotten. After years of the doldrums, the nine largest banks in the euro zone now even want more than 30 billion euros Dividends and share buybacks pour out
On Friday, however, investors were abruptly reminded that the interest rate hikes by the central banks are also associated with major risks for the financial sector. The wake-up call came from a California lender called Silicon Valley Bank and led to the biggest sell-off in bank stocks on Wall Street in almost three years. Prices also collapsed in Europe, with Deutsche Bank temporarily falling by almost eight percent. And not only the Dax was in the red, the stock exchanges in Asia also came under pressure at the end of the week. Numerous cryptocurrencies also fell: Bitcoin fell below the $20,000 mark.
The trigger was a kind of bank run on the Silicon Valley Bank. The finance house specializes in start-up loans and has had to frantically raise new capital in the market to offset write-downs on US Treasury bonds and mortgage securities. Previously, many of its clients — mostly venture-funded startups — had withdrawn their deposits because they could hardly get any additional capital themselves. As a result, the Silicon Valley Bank had to sell almost all of its securities, albeit at a loss, and the share price collapsed by an enormous 60 percent. A few days earlier, the crypto bank Silvergate had also ceased operations in the USA – also due to massive outflows of deposits.
Analysts are now wondering whether this is an isolated case or whether the entire banking industry is affected. “The significance of this collapse goes far beyond this single bank,” says Benjamin Bente, managing director of asset management Vates Invest. “It shows that there are massive problems with the banks that have pushed tech companies with cheap money.” And these problems could be the first stone to fall in a financial domino.
Rising interest rates – higher risks
Indeed, the problems do not only affect US banks. In Germany, too, savings banks and cooperative banks in particular had to increase their securities holdings by several in 2022 due to rising interest rates write off billions of euros. The background: Savings banks and Volksbanks often have more savings deposits than they can lend and invest their excess liquidity in bonds, for example. As long as you can hold these securities to maturity and debtors do not default, such book losses are harmless.
Mark Branson, head of the German financial regulator Bafin, nevertheless points again and again the risk that the losses could actually materialize if institutions come under pressure to monetize assets. In a recent interview with the SZ, his colleague Andrea Enria from the ECB Banking Supervision department warned against underestimating the current dangers on the financial markets. In principle, rising interest rates are good for banks’ traditional lending business, but they also harbor risks because many investors and companies around the world are highly indebted.