Markets on both sides of the Atlantic failed to be reassured on Monday by government intervention as the fallout from the rapid collapse of Silicon Valley Bank prompted a heavy sell-off of bank shares.
Joe Biden sought to bring calm at the start of the week, saying: “Americans can rest assured that the banking system is safe, their deposits are safe … we will not stop at this, we will do whatever is needed.”
On Sunday, regulators announced the closure of a second bank, the New York-based Signature. Depositors in Signature and SVB are protected by the overnight federal intervention, along with any other that runs into difficulties, but investors in both have been wiped out.
Wall Street opened down, with the Dow Jones down 0.8%, S&P 500 down 1% and the Nasdaq down 0.8%. In Europe the FTSE 100 was down 2.5%, Italy’s FTSE Mib was down 4.5%, Germany’s Dax was down 3.3% and France’s Cac was off 3.2%.
Bank shares were among the biggest fallers, with Bank of America, Barclays and Standard Chartered all down 7%. Charles Schwab was down by a quarter.
Signs that the crisis is spreading came before markets opened in New York, with San Francisco-based First Republic shares losing 70% of their value in premarket trading after declines of 33% last week.
Shares in PacWest Bancorp, headquartered in Los Angeles, dropped 53%, and Western Alliance Bancorp, based in Phoenix, Arizona, lost 29% in the premarket. Zions Bancorporation, based in Salt Lake City Utah, shed 11%. KeyCorp, based in Cleveland, Ohio, fell 10%.
First Republic and PacWest have exposure to venture capital clients in the tech sector, the same area of investment that was exposed by Silicon Valley Bank’s collapse. A senior US Treasury official told Bloomberg that other institutions were exposed to the same forces that caused SVB to collapse.
US government bonds soared as investors moved into safer assets amid expectations that central banks will slow or halt plans for interest rates to try to contain stress in the markets.
The yield on the US Treasury 10-year note was down 14 basis points to 3.5562%. The yield on the two-year Treasury was last trading at 4.2739% after declining by more than 31 basis points. Yields fall when bond prices rise.
In London, the government and the Bank of England brokered a deal to sell Silicon Valley Bank’s UK division to HSBC for £1.
Despite the backstop plan announced by the US Federal Reserve on Sunday night, the crisis is now putting pressure on US central bankers to slow the rate of interest rate rises – a key factor in SVB and Signature’s collapses.
after newsletter promotion
Goldman Sachs analysts said they no longer expect the Federal Reserve to raise rates again later this month as the casualties in its battle to bring down high inflation are emerging in a financial system accustomed to cheap money.
Intervention to protect depositors, but not failing institutions, initially calmed fears that the crisis could spread. That confidence could now be evaporating, however.
“Rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age,” the Capital Economics analyst Paul Ashworth said. “But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”
However, others expressed confidence that the drops in bank stocks on Monday represented signs that investors were waking up to the seriousness of the situation and would later be calmed by government interventions.
“I don’t think the system as a whole is inherently financially unstable, certainly systemic risk has been considered low,” said Susannah Streeter, the head of money and markets at Hargreaves Lansdown.
“I think you’re seeing is this risk-averse nature really sweeping through and renewed worries just about higher interest rates being elevated for longer and the repercussions of that,” Streeter told Bloomberg.
