Market turbulence and rising rates weigh on EU banking

Significance

Doubts over three large European banks have driven down the stock prices of German and French banks even though the sector benefits from a comfortable return on equity, rising interest margins and high prudential ratios.

Impacts

• Stricter regulations leave EU banks more capitalised and less exposed to liquidity risks than US banks, but reduce their lending capacity.
• The risk that a confidence crisis will threaten the financing of EU banks cannot be brushed aside.
• EU supervisors are keen to reassure AT1 bond holders but longer-term, prudential rules may be revised to restrict AT1 bond use.
• Bank lending is slowing to firms and consumers; tighter credit conditions and a shaper slowdown would weigh heavily on economic activity.