Crisis in American banking sends jitters across Europe’s banking sector, increasing risk of BANK DEFAULTS
02/14/2024 // Arsenio Toledo // Views

Europe's banking sector is concerned as financial instability in the United States is increasing the risk of banks defaulting in the continent.

Back in late November 2023, the European Central Bank warned that the balance sheets of banks in the eurozone – the currency union of 20 European Union states who all use the euro as their official currency – are showing "early signs of stress" after a rise on loan defaults and late repayments from historic lows. (Related: Banks cut more than 60,000 jobs in 2023 – worst banking industry year since 2008.)

Late last month, Reuters reported that European banks are facing a big test when investors assess how fast the boost from higher interest rates is fading and whether or not their long run of soaring profits and record shareholder payouts will come to an end.

"What you are looking at for European banks is a 10-year inflection point," warned Sebastian Pirro, chief investment officer from the London-based Algebris Investments, which holds shares in multiple European banks.

"There are portions of the market that we think are in very deep trouble," warned Jonathan Golan, a portfolio manager at London-based investment management firm Man Group Plc. "You've got more banks that are coming under scrutiny, more banks falling casualty, and potentially some banks defaulting on both sides of the Atlantic."

Europe concerned over U.S. real estate collapse

Investors are concerned over the state of the U.S. commercial real estate market. Exposure to this concern has already affected domestic banking giants, such as New York Community Bancorp. But this concern has also led to plunges in the shares of banks all over Europe.

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"In Germany and Scandinavia, we are seeing commercial real estate exposure as percent of tangible equity in the 400, 500, 600, 700 percent range," said Golan. "If each of these banks takes a 15-cent write-down for every dollar they lend to commercial real estate – which I'm not saying is a base case, but is a completely reasonable scenario – not only are these banks not investment grade, they're insolvent."

Early signs of a potentially shaky European banking environment are already appearing. Bonds recently issued by real estate-focused German lenders slumped in the second week of February after Morgan Stanley analysts recommended clients sell senior bonds issued by real estate-specializing bank Deutsche Pfandbriefbank.

Major European banks whose U.S. commercial real estate loans account for one percent or less of their assets are unlikely to be significantly threatened by any major disruptions to the American real estate market. These include Germany's Deutsche Bank AG, HSBC Holdings Plc in the United Kingdom and BNP Paribas SA in France.

But Bloomberg Intelligence financial analysts warn that many banks hold higher percentages of U.S. commercial real estate loans. For Pfandbriefbank, it's 10 percent. For Aareal Bank in south central Germany, it's 16 percent.

But despite these recent jitters, Golan believes parts of the banking sector are likely to survive or even thrive after the crisis, especially banking industries in smaller jurisdictions where the market is more concentrated among only a handful of big corporations and where margins are likely higher. He noted how some central and eastern European lenders as well as some specialist banks in the U.K. that don't compete for the same U.S. commercial real estate loan business with major players could get out of a possible crisis relatively unscathed.

"There are several very strong institutions that have modest exposure to commercial real estate, differentiated business models, strong profitability, solvency and liquidity," said Golan. "It is in these areas where we find attractive opportunities."

Watch this video from John Williams discussing the spread of the banking crisis in America.

This video is from the This Is John Williams channel on

More related stories:

Commercial real estate COLLAPSE threatens to trigger a wave of bank failures.

Fears of more regional bank failures grow as Moody's cuts New York Community Bancorp's credit rating to junk status.

Steve Quayle: Systematic takedown and takeover of U.S. banking system is ALREADY HAPPENING.

Mass bank branch closures and troubled real estate sector point to impending U.S. financial crisis.

Top U.S. banks shut 64 branches in a single week … are you affected?

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