📝 Eurozone Banks Appear to Be Well Capitalized: Wells Fargo

Concerns surrounding the U.S. banking sector in recent days, European banks are in focus today, with banking sector stocks under pressure. Overall, the liquidity position of the Eurozone banking sector appears to have improved in recent years, as evidenced by a drop in the loan-to-deposits ratio (LDR). For countries participating in the Single Supervisory Mechanism (SSM), in Q2-2015 the LDR ratio stood at 126.6%, but by Q3-2022 that ratio had fallen to 104.8%, suggesting more of a balance between banks' deposits base and loans extended to customer.

Eurozone banks in aggregate appear to be adequately capitalized. The Common Equity Tier 1 ratio stood at 14.75% in Q3-2022, down slightly from a peak of 15.56% in Q4-2020. The broader Tier 1 ratio stood at 15.84% in Q3-2022, down from a peak of 16.67% in Q4-2020. While those capital ratios have softened moderately in recent quarters, they remain well above levels prevailing at the time of the global financial crisis. For comparison, the Tier 1 capital ratio stood at 7.96% in Q4-2007.

From a policy perspective, if European banking sector difficulties were to worsen and have meaningful economic effects, it could curtail the extent of European Central Bank monetary tightening. However, in our view at this stage we believe aggressive and emergency monetary easing from the European Central Bank to stabilize the banking sector is not that likely. - Wells Fargo