SVB Deal Helps to Steady Banks Amid Credit Crunch Concerns

A buyer for Silicon Valley Bank’s deposits and loans helped shares in European lenders mount a partial recovery on Monday, after the sector was hammered last week by worries of systemic bank stress and a credit crunch.

There are also hopes for extra support for bank funding, after Bloomberg News reported U.S. authorities were in early stage deliberation about expanding emergency lending facilities in an effort to contain the worst banking shock since the 2008 global financial crisis.

The sudden collapse of tech-focussed SVB earlier this month destabilised the sector and drew some of Europe’s biggest banking names into investors’ focus. Indications that its failure is being resolved by authorities in a smooth manner could help underpin confidence.

Over the weekend, First Citizens BancShares Inc bought all the loans and deposits of SVB and gave the Federal Deposit Insurance Corp equity rights in its stock worth as much as $500 million in return, the FDIC said in a statement.

Customers retain access to their accounts, North Carolina-based First Citizens said, and branches open on Monday. SVB’s failure will cost its deposit insurance fund about $20 billion, the FDIC estimates.

“The move is positive for financial stability and the venture capital industry,” said Gary Ng, senior economist at Natixis Hong Kong.

Banking stocks in Europe opened higher on Monday after a torrid previous session. Germany’s biggest lender Deutsche Bank, which had slumped 8.5% on Friday alongside a sharp jump in the cost of insuring its bonds against the risk of default, rose 4.5% in early Monday trade.

A broader index of Europe’s top banks rose 1.4%, after sliding nearly 4% in the previous session.

The First Citizens deal for SVB sealed the first weekend in several weeks that did not bring news of fresh banking collapses, rescues or emergency help from authorities.

“You sweep Silicon Valley off to another buyer, which is good,” said IG Markets analyst Tony Sycamore in Sydney.

“But the bigger issue is guaranteeing deposits at all those other (U.S. regional) banks…it’s a little bit of calm before the next storm.”

Last week ended with indicators of financial market stress flashing.

On Monday, bank shares in Asia were mixed – mostly steady in Australia and Tokyo but slipping in Hong Kong, where Standard Chartered shares fell nearly 4% as prices caught up with the wild Friday in Europe.

S&P 500 futures rose 0.5%.

The collapse of SVB has sent U.S. depositors fleeing smaller banks for larger cousins while the hit to confidence forced Credit Suisse into the arms of rival UBS last week.

In March, the Stoxx index of European bank shares is down more than 18% and the U.S. KBW regional bank index has lost 21%, with investors on edge about what’s next.

“I don’t think you can sit here and say, ‘Well, that’s all done, Silicon Valley Bank and Credit Suisse and, you know, life will go back to normal,'” Australia and New Zealand Banking Group Chief Executive Shayne Elliott said in an interview posted on the bank’s website.

“These things tend to roll through over a long period of time,” Elliot said.

Carrots, Sticks and Acronyms

The sudden spike in tensions for banks has raised questions about whether major central banks will continue to pursue aggressive interest rate hikes to tamp down inflation, and whether tightened lending will hurt the global economy.

A U.S. Federal Reserve policymaker said on Sunday that stress in the banking sector is being closely monitored for its potential to trigger a credit crunch, with a European Central Bank official also flagging a possible tightening in lending.

In Europe, bank bonds are under pressure and credit default swaps, or the cost of insurance against defaults, uneasily high.

In the U.S., where flows into money market funds have risen by more than $300 billion in the past month to a record atop $5.1 trillion, focus is on depositors’ confidence.

The SBV deal may shore some of that up. First Citizens said it would take on assets of $110 billion, deposits of $56 billion and loans of $72 billion, and expand in California. It will share further potential losses with the FDIC and the FDIC retains some $90 billion in securities held for disposal.

“Effectively you’re going to get a combination of carrots, sticks, and acronyms in order to ensure you get the outcome you want and that allows (authorities) to still use interest rates to combat inflation,” Rabobank strategist Michael Every said.

“This seems to be part and parcel of that.”


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