Is a new banking crisis rolling towards the financial market?

The banks deny this, but their supervisors warn them not to be overconfident.

That's what the chief banking supervisor of the European Central Bank (ECB), Andrea Enria, did a few days ago and pointed out the increasing credit risks.

The head of ECB banking supervision advises against relying on broad government rescue programs like in the corona pandemic.

In addition, the EU Systemic Risk Council (ESRB) issued an acute crisis warning for the financial market last week.

Markus Fruehauf

Editor in Business.

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European banks still have a solid equity base.

This is shown by the key figures published on Thursday by the EU banking supervisory authority EBA for the second quarter.

At the end of June, the ratio for the common equity liable immediately in the event of losses (CET 1) was at a solid level.

According to the EBA statistics, the liquidity buffers were similarly good.

The number of non-performing loans also continued to decline.

However, the figures should be taken with a pinch of salt, because the banks are still faced with the swings in the looming recession and the looming loan defaults that will follow.

More shaky loans than in the pandemic

This is indicated by the numbers on shaky loans, which are showing signs of disruption but are yet to be classified as non-performing.

According to the EBA figures, these have risen to 9.5 percent of the total credit volume and thus to a higher level than in the corona pandemic.

This is a clear sign of increased credit risk.

Rating agency S&P Global recently warned that a recession will weigh on European bank earnings.

As high as Lehman Brothers

The market for credit default swaps shows how nervous investors are becoming about banks.

The risk premiums for the so-called credit default swaps (CDS) have risen significantly over the past twelve months.

At the major Swiss bank Credit Suisse, they have reached a level at which CEO Ulrich Körner felt compelled to reassure his employees.

This resulted in turbulence on the stock market and a new record low for Credit Suisse shares.

For the five-year period, the CDS premium for Credit Suisse is currently 3.67 percentage points.

This means that securing a claim of one million euros against the Swiss bank costs an annual premium of 36,700 euros.

A year ago only 6100 euros had to be paid.

Jochen Felsenheimer, managing director of Munich-based asset manager Xaia Investment, is an expert on the CDS market.

He looks with great concern at default insurance for a year: According to him, the CDS premium for Credit Suisse currently costs 6.25 percentage points.

This corresponds to a failure probability of 12 percent.

“That's almost dramatically high because Lehman Brothers' loan default swaps were trading at that level a week before the collapse.

However, I think the level at Credit Suisse is currently somewhat exaggerated because their balance sheet and collateral are much more solid than Lehman's was in September 2008.”

In general, the risk premiums on the CDS market have risen significantly since the beginning of the year.

“As a recession becomes more likely, investors are becoming more cautious.

They expect more loan defaults," says Felsenheimer in an interview with the FAZ

The growing nervousness can also be seen in the CDS premiums of Deutsche Bank (1.65 percentage points) and Commerzbank (1.37).

Twelve months ago, both default insurances were still being traded at premiums of less than 0.5 percentage points.

The increase in CDS premiums has been accompanied by a decline in bank shares.

Since Russia invaded Ukraine, the Stoxx banking index has lost 30 percent.

The leading index for the euro zone, the Euro Stoxx 50, is down 18 percent.