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A slogan is written on the sidewalk outside the world headquarters of Swiss bank Credit Suisse the day after its shares fell around 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 biggest bank failure since the global financial crisis, and the emergency bailout of Swiss credit by a Swiss rival UBSsparked a sell-off in bank stocks as fears of contagion spread.
German Bank was the next target, with shares plunging and the cost of insuring against its default skyrocketing at the end of last week – despite the German lender’s strong capital and liquidity positions.
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The market panic appeared to ease on Monday after First Citizens agreed to buy a large chunk of the assets of failed Silicon Valley Bank. The S&P 500 Banks index climbed 3% on Monday but remains down 22.5% from March, while in Europe the Stoxx 600 Banks index closed up 1.7% on Monday but lost more than 17% this month.
The volatility – sometimes in the absence of any discernible catalyst – led market watchers to question whether the market was operating on sentiment rather than fundamentals when it came to fears of a systemic banking crisis.
“It’s not like Lehman Brothers subject to counterparty risk in complex derivatives during the subprime crisis,” noted Sara Devereux, global head of the fixed income group at asset management giant Vanguard, in a Q&A on Friday. .
“Banks in recent headlines were having risk management issues with traditional assets. Rapidly rising rates exposed these weaknesses. Banks were forced to become sellers, realizing losses after their bond investments were well below their face value.
She suggested that companies like SVB and Credit Suisse could still exist today if they had not lost the trust of their customers, as evidenced by the massive outflows of depositors from the two banks in recent months.
“It was more of a ‘sentimental contagion’ rather than the true systemic contagion we saw during the global financial crisis. Leading economists believe the damage has been largely contained, thanks to prompt action by federal agencies and other banks,” Devereux said. .
“irrational market”
This point of view was taken up by Citywho concluded that in the absence of a clear explanation for Friday’s moves, what we are seeing is an “irrational market”.
The plunge in Deutsche Bank’s share price – which fell 8.6% on Friday – could be an example. The bank launched a huge restructuring effort in 2019 and has since posted 10 straight quarters of profits. Shares recovered 6.2% on Monday to close above 9 euros ($9.73) per share.
There was speculation that the drop could have been due to Deutsche’s exposure to US commercial real estate or a request for information from the Department of Justice (DoJ) to a number of banks regarding Russian sanctions. , but Citi joined the chorus of market analysts concluding that these were insufficient to explain the movements.
“As we saw with CS, the risk is if there is a psychological impact of various media headlines on depositors, whether the initial reasoning behind it is 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 strengthen the regulation, supervision and risk management of banks – means that banks are all “highly capitalised”.
He pointed out that prior to its emergency sale to UBS, Credit Suisse’s Common Equity Tier 1 ratio and Liquidity Coverage Ratio, two key indicators of a bank’s strength, suggested that the bank was still solvent and liquid.
Scott said the 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 period of time, but he pointed out that major European lenders are facing a very different picture of small and medium-sized enterprises. mid-sized US banks.
“We’ve seen a lot of things break and we didn’t really pay attention to it because it was outside of regulated capital. We’ve seen things break in the crypto world, but we’ve got it in kind of ignored, and then we saw SVB and we started paying attention because it was getting closer and closer,” Scott told CNBC’s “Capital Connection.”
“I think the problem is with small and medium banks in the United States, they’re not regulated by Basel III, they haven’t been stress tested and that’s where you start to see real problems. capitalization of banks in Europe, I think we have a completely different picture and I wouldn’t be worried.”
