The crisis in the U.S. banking sector is raising concerns for European banks, increasing the risk of default.

The crisis in the U.S. banking sector is causing concern in the European banking sector and increasing the risk of bank defaults on the continent. In late November 2023, the European Central Bank warned that the balance sheets of banks in the eurozone - a currency union of 20 European Union states that use the euro as their official currency - are showing "first signs of stress" after loan defaults and repayment delays rose from historic lows. (See also: Banks cut more than 60,000 jobs in 2023, the worst year for the banking industry since 2008.)

Reuters reported late last month that European banks will face a major test as investors assess how quickly the lift from rising interest rates is fading and whether a long-term period of rising profits and record shareholder payouts is coming to an end. "What you're facing in terms of European banks is a 10-year turning point," warned Sebastian Pirro, chief investment officer at London-based Algebris Investments, which owns shares in several European banks. "There are parts of the market that we think are in very serious trouble," warned Jonathan Golan, a portfolio manager at investment firm Man Group Plc of London. "You have more banks being audited, more banks being victimized and possibly some banks starting to default both on the East Coast and the West Coast."

Europe is concerned about the crisis in the U.S. real estate market

Investors are worried about the state of the U.S. commercial real estate market. That concern has already affected domestic banking giants such as New York Community Bancorp. But that concern has also led to drops in bank stocks across Europe. "In Germany and Scandinavia, we're seeing commercial real estate exposures of 400, 500, 600, 700 percent of equity," Golan said. "If each of these banks reduces the value of every dollar pledged on commercial real estate by 15 cents - I'm not saying that's the base case scenario, but it's perfectly reasonable - these banks would no longer be investment grade, they would go bankrupt."

The first signs of a potentially unstable banking environment in Europe are already beginning to emerge. Bonds recently issued by German real estate banks collapsed in the second week of February after Morgan Stanley analysts recommended that clients sell senior bonds of Deutsche Pfandbriefbank, which specializes in real estate. Large European banks whose U.S. commercial real estate loans account for one percent or less of their assets are unlikely to be significantly exposed to the threat of major disruptions in the U.S.

However, financial analysts at Bloomberg Intelligence warn that many banks have a higher percentage of commercial real estate loans in the United States. For Pfandbriefbank, the figure is 10 percent, and for Aareal Bank in southern Germany, it's 16 percent. But despite recent worries, Golan believes that 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 just a few large corporations and where margins are likely to be higher. He noted how some central-eastern European lenders, as well as some specialty banks in the U.K. that don't compete with the big players in the U.S. commercial real estate loan market, could emerge from a possible crisis relatively unscathed. "There are some very strong institutions that have small commercial real estate exposure, distinctive business models, strong profitability, solvency and liquidity," Golan said. "It is in these areas that we are finding attractive opportunities."

Check out this video from John Williams in which he discusses the spread of the banking crisis in America. This video is from the This Is John Williams channel on Brighteon.com.

More on this topic: collapsing commercial real estate market threatens to trigger a wave of bank failures. Fears of further collapse of regional banks grow as Moody's downgrades New York Community Bancorp's credit rating to junk. Steve Quayle: The systematic destruction and takeover of the U.S. banking system is already underway. Massive bank branch closures and a troubled real estate sector point to a coming financial crisis in the US. Major US banks closed 64 branches in one week.... are you affected?

Sources: finance.Yahoo.com FT.com FT.com Reuters.com Brighteon.com.