March 2, 2021

Fears Grow in Europe That Banks Need Cash

Bank shares led a renewed plunge by global stocks Thursday, as tentative signs of stress in the interbank market caused investors to assume the worst.

There was particular alarm after a single bank, out of nearly 8,000 in the euro zone, took advantage of a European Central Bank program that ensures institutions have ample access to dollars. The bank, which the E.C.B. declined to identify, borrowed $500 million on Wednesday, a relatively modest sum.

But it was the first time any bank had tapped the E.C.B. dollar pipeline since February. A shortage of dollar financing for European banks was one of the more alarming features of the financial crisis in 2008.

European shares tumbled Thursday, with the main stock index in France down 5.5 percent and the major German index off 5.8 percent. On Wall Street, the major indicators were down 4 percent or more in midafternoon trading, with the Dow Jones industrial average falling more than 450 points. In the sell-off of stocks, money poured into gold and U.S. Treasury securities.

The market reaction highlighted how skittish investors are in the absence of comprehensive information about the banking system. While there are statistics to tell economists whether industrial output and unemployment are going up or down, there is no instrument on the financial dashboard that clearly signals when banks are having trouble meeting their daily cash needs by borrowing from each other.

“We don’t have the basic data,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “We need more granular information about liquidity conditions and conditions on the interbank market.”

The lack of certainty makes bank executives fearful that other banks might be bad risks. Banks worry that they may have trouble borrowing themselves. So at times they may stop lending and hoard cash — which in 2008 contributed to a sharp recession, and which may be at work now.

Investors are clearly unsettled. Banks like Société Générale in France and Barclays in Britain were among the biggest losers Thursday.

“If you look at how bank share prices are doing, there is a concern in the market,” said Nick Matthews, senior European economist in London for Royal Bank of Scotland. “There is so much nervousness, it is one of these situations where there is scope for sentiment to be self-fulfilling.”

“Currently many banks cannot access term funding markets at reasonable rates,” analysts at Morgan Stanley wrote in a note. “As a result, commercial banks continue to tighten their credit conditions, albeit marginally, to both their corporate and retail clients. If these term funding stresses continue well into the fall, the risks are rising that a lack of credit availability could dent domestic demand growth further.”

Many analysts counseled calm, however, saying that while there was clearly stress in the market it was still far below 2008 levels. “There is undoubtedly some tension around,” said Jon Peace, a banking analyst in London for Nomura. But, he added, “I think the market is still overreacting to this funding issue.”

They also point to big differences between now and 2008. Banks have more capital in reserve, they are less reliant on short-term financing, and policy makers have more practice dealing with financial emergencies.

But Viral V. Acharya, a professor of economics at the Stern School of Business at New York University, notes an unsettling parallel. Then, as now, a damaged asset was spread widely through the banking system. In 2008 it was securities tied to subprime mortgage loans. Now it is sovereign debt.

Because government debt was once thought to be almost risk free, banks did not set aside reserves in case of losses and were not required to by regulators.

“This has been an asset considered too safe to fail,” Mr. Acharya said. “If your safest asset is going to take even a 1 percent or 2 percent haircut, and you have not been holding any capital, a lot of other asset classes will come under stress.”

There are numerous indicators that analysts watch for signs of interbank stress, but they are ambiguous or open to interpretation. Investors closely watch how much banks borrow from the E.C.B., which can be a sign that they are unable to borrow from their peers at reasonable rates. It is no secret that most banks in Greece would collapse without access to E.C.B. loans.

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