European banks show liquidity strength amid market turmoil

Large European lenders entered the recent banking sector turmoil with liquidity levels that were well above regulatory minimums and that improved, on average, in the most recent quarter.

US-based Silicon Valley Bank collapsed on March 10 due to a liquidity mismatch, prompting a market sell-off and concerns about the health of banks in Europe, in particular Credit Suisse Group AG. On March 19, Swiss authorities orchestrated an emergency takeover of the lender by Zurich neighbor and rival UBS Group AG, and the central banks of major economies took coordinated action to ramp up the provision of US dollar liquidity to commercial banks.

Large banks' liquidity coverage ratios (LCRs), which measure their ability to withstand cash outflows, ranged from 131.30% to 303% at the end of 2022, according to S&P Global Market Intelligence data. Systemically important banks are required to hold LCRs of more than 100%.

Of a sample of 35 banks, 18 recorded a quarter-over-quarter deterioration in their LCR, compared to 17 that saw an improvement. Credit Suisse's LCR fell the most, by 47.83 percentage points, to 144.17%. The average for large banks, meanwhile, improved to 173% from 170%.

Credit Suisse is an outlier that had unique risk management deficiencies and was undergoing a deep restructuring, and the wider European banking sector's performance is likely to be resilient, S&P Global Ratings said in a March 21 report. Although other large, internationally active European banks have also had to restructure, most of this work has been completed.

Furthermore, smaller banks have had to realign their business models in light of regulatory changes or more intense competition due to digitalization, the rating agency said.

– Analyze individual bank liquidity composition using the Bank Regulatory Capital template on S&P Global Capital IQ Pro.  – Learn how to find LCR metrics on Screener. – Access the UBS-Credit Suisse deal page on S&P Global Capital IQ Pro.

European banks are also benefiting from higher interest rates, which boost their income from traditional lending business. The European Central Bank pushed ahead with its plan to hike rates by half a percentage point on March 16 in spite of the market turmoil, and the Bank of England increased its base rate by a quarter point on March 23.

The UBS-Credit Suisse tie-up and associated liquidity measures should shore up confidence in Europe's banks, rating agency Moody's wrote in a March 21 report. No other large European banks demonstrate the kind of credit profile weakness that caused investors to lose confidence in Credit Suisse, and they are unlikely to crystallize losses on bond holdings as Silicon Valley Bank was forced to do, according to the agency.

Deposits are likely to be more stable in Europe than in the US, partly because they have grown less quickly, Moody's said. Cash held at central banks is a larger part of their balance sheets, and most have a lower share of confidence-sensitive corporate deposits, the agency added. All EU banks are subject to LCR requirements, which is not the case in the US.

On average, large European banks have higher LCRs than their US counterparts, Market Intelligence data shows.