Turmoil in European banks - what's happening and what are the opportunities?

What is happening in markets now?

As the collapse of US bank SVB took place last week, authorities stepped in to contain the fallout and prevent a broader impact on the financial sector. New liquidity measures from the Federal Reserve and the announcement that both SVB and Signature Bank's depositors will be made whole were meant to shield the banking industry from contagion risks.

What we are witnessing now though is further turmoil as markets wrestle with deteriorating financial conditions and fears of contagion outside of the US banks. This is all set against the backdrop of excessively high inflation that central banks globally still need to tackle.

There’s still a lot of leverage in the system and interbank markets are seeing liquidity drying up. Volatility feeds further volatility in a similar feedback loop as we saw during the covid market turmoil and clients should ready themselves accordingly.

From a cross-asset perspective, equities and credit have held up way better than they should have during the whole hiking cycle.  Financial sector valuations have especially been booming, which has left the sector vulnerable to a re-pricing. The Stoxx 600 banks have fallen 15% since the SVB story hit last week but the index is still up +23% from the end of September 2022 (as illustrated in the chart). In a way, one could even say that this was long overdue and hence needed, even though the way it is unfolding is far from optimal.