EU Elections: Potential Risks for European Banks Ahead
As the EU Parliamentary Elections approach, the European banking sector faces potential challenges despite its recent strong performance. Big European banks have seen significant growth driven by increased deal-making and high revenue from investment banking. The Euro Stoxx banking index (SX7E) has surged by 19%, outpacing the Euro Stoxx 600 Index (SXXP) which rose by nearly 9% this year. This growth has even exceeded that of its US counterpart, the SPDR Select Sector Fund (XLF), which climbed 9% year-to-date.
The sector’s outperformance can be attributed to major banks surpassing market expectations in their first-quarter earnings, potentially paving the way for further valuation upgrades. However, the upcoming EU elections pose uncertainties for the sector. The new leadership has yet to address the unresolved issue of a joint deposit insurance policy, a matter that has been brought to light by the current ruling party.
European leaders have been working towards the establishment of a banking union, with a recent plan approved by the European Parliament to create a joint deposit insurance pool for EU banks. This initiative aims to enhance deposit protection and mitigate risks in the banking system following the collapse of US regional banks and Credit Suisse’s troubles last year.
The push for a broader European Deposit Insurance Scheme underscores the recognition of the necessity for a banking union, particularly in response to the global financial crisis of 2008. The completion of the banking union remains a crucial step for the stability and resilience of the European banking sector.
As the EU elections loom, the fate of European banks hangs in the balance, awaiting clarity on the joint deposit insurance policy and the potential implications of the new leadership’s decisions on the sector’s future.
