A slogan is on the sidewalk in front of the global headquarters of Swiss bank Credit Suisse, the day after shares fell about 30% on March 16, 2023 in Zurich, Switzerland.
Arnd Wiegman | Getty Images News | Getty Images
The collapse of the US-based Silicon Valley Bank, the largest bank failure since the global financial crisis, and the bailout of Credit Switzerland by Swiss rival UBSsparked a sell-off in bank stocks as contagion fears spread.
German Bank was the next target, with stocks plummeting and the cost of insuring against default soaring late last week, despite the German lender’s strong capital and liquidity positions.
The market panic appeared to abate Monday after First Citizens agreed to buy a large chunk of Silicon Valley Bank’s bankrupt assets. The S&P 500 Banks index climbed 3% on Monday but remains down 22.5% in March, while in Europe the Stoxx 600 Banks index closed 1.7% higher on Monday but lost more than 17% this month.
The volatility – sometimes without any discernible catalyst – has led market observers to question whether the market is operating on sentiment rather than fundamentals when it comes to fears of a systemic banking crisis.
“This is not like Lehman Brothers subject to counterparty risk in complex derivatives during the subprime mortgage crisis,” Sara Devereux, global head of the fixed income group at asset management giant Vanguard, noted in a Q&A Friday.
“The banks that have been in the news recently had risk management issues with traditional assets. Rapidly rising interest rates exposed those weaknesses. The banks were forced to become sellers and realized losses after their bond investments fell well below face value.”
She suggested that SVB and Credit Suisse could still be standing today if they hadn’t lost the trust of their customers, evidenced by the massive outflow of depositors from both banks in recent months.
“It was more of a ‘sentimental contagion’ than the real systemic contagion we saw during the global financial crisis. Vanguard economists believe the damage has largely been contained, thanks to the swift action of federal agencies and other banks,” Devereux said. .
‘irrational market’
This opinion was shared by Citywhich concluded that, in the absence of a clear explanation for Friday’s movements, we are seeing an “irrational market”.
The fall in Deutsche Bank’s share price – which fell 8.6% on Friday – could be an example of this. The bank launched a massive restructuring in 2019 and has posted profits for 10 consecutive quarters since then. Shares recovered 6.2% on Monday to close above 9 euros ($9.73) per share.
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There was speculation that the drop could be due to Deutsche’s exposure to US commercial real estate or an information request from the Department of Justice (DoJ) to some banks related to Russian sanctions, but Citi joined the chorus of market analysts concluded that these were insufficient to explain the moves.
“As we have seen with CS, there is a risk that different headlines will psychologically have a domino effect on savers, regardless of whether the initial reasoning behind this was correct or not,” the strategists added.
Is Europe different?
Dan Scott, head of Vontobel Multi Asset, told CNBC on Monday that the introduction of the Basel III framework — measures introduced after the financial crisis to support banks’ regulation, supervision and risk management — means European banks will all be are “heavily capitalized”.
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He pointed out that prior to the emergency sale to UBS, the Common Equity Tier 1 ratio and Credit Suisse’s liquidity coverage ratio, both key measures of a bank’s strength, suggested that the bank was still solvent and liquid.
Scott said failures were an inevitable consequence of the rapid tightening of financial conditions by the US Federal Reserve and other central banks around the world in a relatively short space of time, but he emphasized that large European lenders have a very different view than small and medium-sized banks. major US banks.
“We saw a lot of things break and didn’t really pay attention to it because it was outside of regulated capital. We saw things break in the crypto world but we just ignored it, then we saw SVB and we started paying attention because it’s getting closer and closer came,” Scott told CNBC’s “Capital Connection.”
“I think the problem is with the small and medium sized banks in the US, they’re not regulated by Basel III, they’re not stress tested and that’s where you start to see real problems. For the core, the big cap banks in Europe, I think we’re looking at a very different picture and I wouldn’t worry.