Global bank stocks plummeted on Monday as President Joe Biden promised decisive action to stabilize the U.S. banking system after the unexpected collapses of Silicon Valley Bank (SVB) and Signature Bank.
Despite emergency measures allowing banks access to additional funding, investor concerns about potential ripple effects continued to impact markets worldwide.
The White House stated that the Treasury Department is collaborating with regulators to determine the next steps.
With fears of further bank failures, major U.S. banks saw a $90 billion decline in stock market value on Monday, totaling nearly $190 billion lost over the last three trading days.
Regional banks took the hardest hit; shares of First Republic Bank fell over 60%, and both Western Alliance Bancorp and PacWest Bancorp also saw sharp declines.
The shockwaves initially hit Europe, where the STOXX banking index dropped 5.7%. Commerzbank in Germany fell by 12.7%, and Credit Suisse dropped 9.6% to a record low.
Biden assured that the U.S. banking system remains safe, stating, “Your deposits will be there when you need them,” and pledged tougher regulations in the wake of the biggest U.S. bank failure since the 2008 financial crisis.
The SVB collapse ignited a political debate in Washington, with Democrats blaming a 2018 bank deregulation bill signed by former President Donald Trump. Senator Bernie Sanders argued, “The failure of Silicon Valley Bank is a direct result of an absurd 2018 bank deregulation bill.”
Republicans dismissed these claims, denying that the regulatory changes during Trump’s presidency contributed to the crisis.
As market indicators of credit risk in both the U.S. and eurozone banking systems rose, Rick Meckler of Cherry Lane Investments noted, “Your first thought is ‘crisis averted.’ But your second thought is, how big was that crisis?”
Amid market uncertainty, gold prices surged above $1,900, driven by safe-haven buying and speculation that the Federal Reserve might slow down its rate hikes.
Mark Dowding of BlueBay Asset Management remarked, “There is a sense of contagion, and where we see a repricing around financials is leading to a repricing across markets.”
Regulators have ensured that SVB customers will have access to all their deposits starting Monday and established a new facility to provide emergency funds to banks, easing borrowing rules at the Federal Reserve.
Outside SVB’s headquarters in Santa Clara, FDIC employees reassured nervous customers lining up for transactions, stating, “Feel free to transact business as usual.”
Regulators also swiftly closed New York’s Signature Bank, which had been under pressure in recent days.
Mark Sobel, a former senior Treasury official, called for a “serious investigation” into why regulators missed warning signs and what reforms are needed.
Companies worldwide scrambled to assess the impact of SVB’s collapse on their finances, with Germany’s central bank convening a crisis team.
HSBC announced it would purchase the British arm of SVB for one pound, following marathon weekend negotiations.
UK Prime Minister Rishi Sunak expressed confidence in the stability of Britain’s banking system, stating, “Our banks are well capitalised, the liquidity is strong.”
Market expectations around interest rates shifted dramatically, with traders seeing a 50% chance of no rate hike at the upcoming Federal Reserve meeting. Earlier, a 25 basis-point hike was anticipated with a 70% likelihood of a 50-point increase.
Sobel cautioned that the Fed’s options are limited: “The Fed could cut rates, but that has its own drawbacks… Is this a one-off adjustment in regional banks, or does it portend more to come?”
