Silicon Valley Bank collapse: U.S. bank stocks rally despite contagion fears – National

U.S. bank stocks jumped on Tuesday, recovering some ground after the failure of Silicon Valley Bank and Signature Bank triggered heavy selling by investors who were already anxious about the impact on lenders of rising interest rates.

Worries about potential contagion had also slammed bank shares in Asia and Europe as investors re-examined their risks, despite assurances from U.S. President Joe Biden and other global policymakers that the financial system is safe.

An indicator of credit risk among euro zone banks hit its highest level since mid-July, while ratings agency Moody’s cut its outlook on the U.S. banking system to negative from stable “to reflect the rapid deterioration in the operating environment.”

Although the VIX volatility index, Wall Street’s “fear gauge,” neared six-month highs overnight, U.S. regional bank shares bounced, with First Republic Bank up 42.3 per cent at US$44.40 a share.

Banking giants Citigroup Inc, Wells Fargo and JP Morgan were also higher.

“If we do not see any high-profile failures in the near future, then the fears would subside,” said Jack Ablin, chief investment officer at Cresset Capital.

Hedge fund Citadel helped send a signal of confidence in the sector by buying a 5.3 per cent stake in Western Alliance Bancorporation, which was among lenders swept up in contagion fears.

Customers have moved deposits to large U.S. banks including JPMorgan Chase & Co, Bank of America Corp and Citigroup from smaller lenders in the past week, sources familiar with the matter said.

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Gauging the financial fallout from bank failures in the U.S.

In Europe, where some see lenders as less vulnerable, the banking index first fell then recovered to rise 2.4 per cent. It posted its biggest percentage loss in over a year on Monday.

“A critical difference between the European and U.S. systems, which will limit the impact across the Atlantic, is that European banks’ bond holdings are lower and their deposits more stable,” Moody’s said in a note.

Shares of embattled Credit Suisse slid as much as 4.5 per cent early on after it said customer “outflows stabilized to much lower levels but had not yet reversed” in its annual report, before paring most of the losses in afternoon trading.

Asian banking stocks had extended their declines overnight, with Japanese banks hard-hit despite reassurances from the Bank of Japan about their capital buffers.

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White House reassures customers after U.S. banks collapse

The market gyrations showed that investor worries about potential contagion to lenders worldwide were not entirely dispelled by Biden’s assurances or emergency U.S. measures to shore up banks by giving them access to additional funding.

“This is part of the process of the knob being turned to tighten financial conditions to make sure that we are on our way to normalising a higher interest rate world,” Morgan Stanley co-president Edward Pick said on Tuesday. “But there might well be surprises, there might well be reactions.”

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 per cent 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 per cent chance seen of 50 basis points.

Short-end yields in the euro zone 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.

The head of Italy’s banking association, Antonio Patuelli, told Il Corriere della Sera he hoped “the ECB will do more thinking than the already announced decision to raise rates further” following SVB’s collapse.

Analysts say uncertainty continues to dog the financial sector. Investors are worried about the health of smaller global banks, the prospect of tighter regulation and authorities’ preference for protecting depositors before shareholders.

Biden said on Monday his administration’s emergency measures meant Americans could 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.

Regulator FDIC had moved swiftly to close New York’s Signature Bank as well as taking control of SVB.

New York’s financial regulator said its decision to close Signature Bank had “nothing to do with crypto” and instead cited “a significant crisis of confidence in the bank’s leadership” after SVB’s demise.

Signature and three former top executives were also sued on Tuesday by shareholders who accused the New York bank of fraudulently proclaiming it was financially strong a mere three days before it was seized by a state regulator. Signature did not immediately respond to requests for comment.

The Republican head of the U.S. House Financial Services Committee also sought to shore up support for the banking system, saying on Tuesday that both the FDIC and the Fed had acted within the law. He said he still planned to hold a hearing and review documents, although no date was announced.

As markets adjusted to the impact of SVB’s collapse, the Wall Street Journal reported on Tuesday that the tech-focused lender was being investigated by the U.S. Department of Justice and the Securities and Exchange Commission (SEC).

Citing people familiar with the matter, the WSJ said the investigators are also examining stock sales that SVB Financial Group’s executives made days before SVB failed, adding that the Justice Department’s probe involves the department’s fraud prosecutors in Washington and San Francisco.

The SEC and a spokesperson for the Justice Department in Washington declined to comment. SVB did not immediately respond to a Reuters request for comment.

Apollo Global Management Inc, Blackstone Inc, and KKR & Co Inc have expressed interest in a book of loans held by SVB, Bloomberg News reported on Tuesday, citing people familiar with the matter.

The portfolio is seen as an attractive buy and was not a contributing factor in run that caused SVB’s demise, it added.