Shares of banks in the eurozone recorded sharp declines on Feb. 24 after Russian forces mounted a large-scale offensive against Ukraine and European Union officials announced new sanctions against Moscow.
Europe’s banks—especially ones in Austria, France, and Italy—are the world’s most exposed to Russia. In the weeks leading up to the start of the Feb. 24 multi-pronged military action against Ukraine by Russian forces, they’ve been gripped by concerns that an invasion would trigger biting sanctions with potential impacts on their operations and on financial stability more broadly.
The Euronext Eurozone Banks Index, which reflects the performance of the largest banking sector firms in the 19 European countries that share the euro, fell 8.4 percent on Feb. 24, erasing all of the index’s gains for the year.
Leading the losses among Italian banks was UniCredit, whose shares plunged 13.5 percent.
UniCredit told Reuters on Feb. 24 its Russian arm had very high loan loss provisions—covering 84 percent of non-performing exposures—and was “very liquid and self-funded.”
“Our equity in the Russian subsidiary is less than 4 percent of the group’s total equity and if you look at loans and total assets it’s even less than that,” UniCredit told the outlet.
In the run-up to Russia’s military action, the European Central Bank (ECB) was reportedly working with lenders active in Russia to assess a range of risks—including liquidity, loan books, trading positions, and operations continuity—from a range of scenarios, including invasion, according to Bloomberg.
Members of the ECB’s policymaking Governing Council were scheduled to meet in Paris for what was described as an “informal get-together” on the eve of a Feb. 25 meet-up of European Union finance ministers. But that gathering, scheduled to begin around lunchtime and conclude around 10 p.m. local time, could now morph into a crisis meeting as policymakers digest news of the invasion and mull potential economic impacts.
“In my view, it is going to have a short-term inflationary effect—that is prices will increase due to higher energy costs,” ECB policymaker Yannis Stournaras told Reuters.
“But in the medium to long term, I think that the consequences will be deflationary through adverse trade effects and of course through the rise in energy prices.”
As news of the military action hit headlines on Feb. 24, Russian stocks were hammered and the country’s currency sank against the dollar to its lowest level on record, prompting Russia’s central bank to announce emergency support measures.
Russia’s central bank announced an emergency support package, boosting liquidity to markets and acting with foreign currency market interventions.
“To stabilize the situation on the financial market, the Bank of Russia decided to start interventions in the foreign exchange market … and conduct operations today to provide additional liquidity to the banking sector,” the central bank said in a statement.
It added that it was poised to deploy “all necessary tools” to maintain business continuity and guard against financial instability.
Russia’s dollar-denominated RTS stock index plunged 38 percent to 742.91 points, while the ruble-based MOEX Russian index fell 33 percent to 2,058.12 points.
Russia’s banks, metals exporters, and large commodities firms all saw sharp selloffs, while so-called safe-haven assets such as gold and bonds saw inflows.