SVB shockwaves rattle global banks in grip of contagion fears
Silicon Valley Bank’s collapse pressured global bank stocks further on Tuesday as investors fretted over the financial health of some lenders, in spite of assurances from U.S. President Joe Biden and other policymakers.
An indicator of credit risk in the eurozone banking system leapt to its highest since mid-July, as worries about contagion risks from the collapse of two U.S. banks compounded investor concerns about the impact on lenders of rising interest rates, Reuters reported.
The VIX volatility index, Wall Street’s “fear gauge”, neared six-month highs overnight, although futures pointed to a modestly higher Wall St open on Tuesday, with U.S. regional banks bouncing in pre-market trading after recent brutal losses.
Banking giants Citi, Wells Fargo and JP Morgan were also 1%-3% higher in the pre-market.
Europe’s banking index fell 0.6% after posting its biggest percentage loss in more than a year on Monday, although some said banks in the region were less vulnerable.
And Britain’s HSBC, which bought SVB’s UK arm on Monday, rescuing a key lender for British technology start-ups, slipped 1.4% in its fourth consecutive day of losses.
Asian banking stocks had earlier extended their declines, with Japanese firms hit particularly hard as anxiety about systemic risk sparked a wider rout in markets.
Japanese financial institutions have sufficient capital buffers to absorb losses caused by external factors, including risks caused by SVB’s collapse, the Bank of Japan said.
Biden’s efforts to reassure markets and depositors came after emergency U.S. measures to shore up banks by giving them access to additional funding failed to dispel investor worries about potential contagion to other lenders worldwide.
“The dramatic collapse of Silicon Valley Bank and widespread market turmoil in the subsequent days is “part of the process” of the world tightening financial conditions after years of cheap money,” Morgan Stanley co-president Edward Pick said.
A furious race to reprice interest rate expectations also buffeted markets as investors bet the U.S. Federal Reserve will be reluctant to hike next week.
Traders currently see a 50% chance of no rate hike at that meeting, with rate cuts priced in for the second half of the year. Early last week, a 25-basis-point hike was fully priced in, with a 70% chance seen of 50 basis points.
Short-end yields in the eurozone tumbled again as investors bet the European Central Bank would moderate its policy tightening at Thursday’s meeting, with chances of a Bank of England hike next week also seen receding.
Analysts say uncertainty continues to dog the financial sector, with investors extremely worried about the health of smaller global banks, the prospect of tighter regulation and a preference to protect depositors at the expense of shareholders.
A wave of customers has applied to shift their accounts to large U.S. banks such as JPMorgan Chase and Citigroup from smaller lenders after SVB’s collapse last week, the Financial Times reported on Tuesday.
Major U.S. banks have lost nearly $190b since the sell-off began, with regional lenders like First Republic Bank, which plunged more than 60% on Monday, hit hardest.
Biden said on Monday that emergency measures taken by his administration meant Americans would be confident the U.S. banking system is “safe”, while also promising stiffer regulation after the biggest U.S. bank failure since the 2008 financial crisis.
Open for business
In a letter to clients, SVB’s new CEO Tim Mayopoulos said it was open and conducting business as usual within the United States and expected to resume cross-border transactions in coming days.
“I recognize the past few days have been an extremely challenging time for our clients and our employees,” said Mayopoulos, a former CEO of federal mortgage finance firm Fannie Mae who was appointed by the FDIC to run SVB.
Regulators also moved swiftly to close New York’s Signature Bank, which had come under pressure in recent days, while Canada’s banking regulator took steps to begin daily check-ins with banks that will enable it to monitor their liquidity, The Globe and Mail reported on Monday.