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The sale of failed Silicon Valley Bank (SVB) to a regional US peer and reports of a possible expansion of funding lifelines lifted banking stocks on Monday, easing worries about systemic stress and a looming credit crunch.
The sudden collapse of tech-focused SVB earlier this month has triggered the worst banking shock since the 2008 global financial crisis and drawn some of Europe’s biggest lenders into investors’ focus.
Signs that SVB’s failure is being resolved by authorities in a smooth manner could help underpin confidence, especially among fragile U.S. regional banks, whose stocks rose sharply in pre-market trade.
Broader indicators of financial market stress were also calmer.
First Citizens BancShares Inc has bought all the loans and deposits of SVB and gave the Federal Deposit Insurance Corp (FDIC) equity rights in its stock worth as much as $500 million in return.
First Citizens also has an agreement to share some losses with the regulator to provide further protection against potential credit losses.
Its shares were up 25% in pre-market trade.
The FDIC estimates SVB’s failure will cost a federal deposit insurance fund about $20 billion.
“The bottom line is that the 2nd and 3rd largest bank failures are now resolved,” wrote analysts at Wells Fargo led by Mike Mayo.
“The other one – Signature – cost the FDIC $2.5 billion and similarly had no direct cost to taxpayers outside of the FDIC. This seems like a toll, especially on the largest banks, but can also show that the industry can absorb these problems and move on without outside assistance,” they wrote.
The collapse of SVB and New York-based peer Signature Bank has left politicians wary of public perceptions that banks are being bailed out again, after anger over the sector’s costly rescue in 2008.
BUYING TIME
The pair’s closures also sent U.S. depositors fleeing smaller regional banks for larger cousins.
Bloomberg News reported U.S. authorities were in early stage deliberation about expanding emergency lending facilities which could give First Republic Bank more time to shore up its balance sheet.
Shares in First Republic, the future of which has been at the centre of investors’ concerns, jumped by more than 30% in pre-market trading on Monday, with peers Western Alliance Bancorp and PacWest Bancorp climbing 6.8% and 11.8%, respectively.
Major U.S. banks JPMorgan Chase & Co, Citigroup and Bank of America advanced between 2% and 2.5%.
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.
Banking stocks in Europe were also higher 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 5.2%.
The Stoxx index of top European bank shares is still down more than 17% this month, however, and the U.S. KBW regional bank index has lost 20%, with investors on edge about what’s next.
LENDING LIMITS
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 US 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 a credit crunch, banks restrict the amount they are willing to lend to consumers and businesses due to heightened concerns about their customers’ ability to pay back their loans.
Some small and concentrated crunches can weigh on growth without bringing the full economy to a standstill. Deeper lending clamp-downs can hobble the economy for years.
Even before the present crisis erupted, bank lending to euro zone companies had slowed for the fourth straight month in February as an economic downturn and increased caution from lenders appeared to take their toll.
In the United States, where flows into less risky 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 SVB 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.
“SVB was a victim of growing too fast and unwisely investing too much of its deposit base in longer-dated treasuries,” said Stuart Cole, head macro economist at Equiti Capital.
“The takeover has provided some reassurance that beneath this huge mistake SVB was basically sound.”
The sudden collapse of tech-focused SVB earlier this month has triggered the worst banking shock since the 2008 global financial crisis and drawn some of Europe’s biggest lenders into investors’ focus.
Signs that SVB’s failure is being resolved by authorities in a smooth manner could help underpin confidence, especially among fragile U.S. regional banks, whose stocks rose sharply in pre-market trade.
Broader indicators of financial market stress were also calmer.
First Citizens BancShares Inc has bought all the loans and deposits of SVB and gave the Federal Deposit Insurance Corp (FDIC) equity rights in its stock worth as much as $500 million in return.
First Citizens also has an agreement to share some losses with the regulator to provide further protection against potential credit losses.
Its shares were up 25% in pre-market trade.
The FDIC estimates SVB’s failure will cost a federal deposit insurance fund about $20 billion.
“The bottom line is that the 2nd and 3rd largest bank failures are now resolved,” wrote analysts at Wells Fargo led by Mike Mayo.
“The other one – Signature – cost the FDIC $2.5 billion and similarly had no direct cost to taxpayers outside of the FDIC. This seems like a toll, especially on the largest banks, but can also show that the industry can absorb these problems and move on without outside assistance,” they wrote.
The collapse of SVB and New York-based peer Signature Bank has left politicians wary of public perceptions that banks are being bailed out again, after anger over the sector’s costly rescue in 2008.
BUYING TIME
The pair’s closures also sent U.S. depositors fleeing smaller regional banks for larger cousins.
Bloomberg News reported U.S. authorities were in early stage deliberation about expanding emergency lending facilities which could give First Republic Bank more time to shore up its balance sheet.
Shares in First Republic, the future of which has been at the centre of investors’ concerns, jumped by more than 30% in pre-market trading on Monday, with peers Western Alliance Bancorp and PacWest Bancorp climbing 6.8% and 11.8%, respectively.
Major U.S. banks JPMorgan Chase & Co, Citigroup and Bank of America advanced between 2% and 2.5%.
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.
Banking stocks in Europe were also higher 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 5.2%.
The Stoxx index of top European bank shares is still down more than 17% this month, however, and the U.S. KBW regional bank index has lost 20%, with investors on edge about what’s next.
LENDING LIMITS
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 US 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 a credit crunch, banks restrict the amount they are willing to lend to consumers and businesses due to heightened concerns about their customers’ ability to pay back their loans.
Some small and concentrated crunches can weigh on growth without bringing the full economy to a standstill. Deeper lending clamp-downs can hobble the economy for years.
Even before the present crisis erupted, bank lending to euro zone companies had slowed for the fourth straight month in February as an economic downturn and increased caution from lenders appeared to take their toll.
In the United States, where flows into less risky 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 SVB 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.
“SVB was a victim of growing too fast and unwisely investing too much of its deposit base in longer-dated treasuries,” said Stuart Cole, head macro economist at Equiti Capital.
“The takeover has provided some reassurance that beneath this huge mistake SVB was basically sound.”
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