MARCH 27 — The sale of failed Silicon Valley Bank to a regional US peer helped stabilise shares in European lenders today, after the sector was hammered last week by worries of systemic bank stress and a looming credit crunch.
The sudden collapse of tech-focussed SVB earlier this month triggered the worst banking shock since the 2008 global financial crisis and drew 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.
First Citizens BancShares Inc has bought all the loans and deposits of SVB and gave the Federal Deposit Insurance Corp equity rights in its stock worth as much as US$500 million in return, FDIC said in a statement.
First Citizens will also have an agreement with the regulator to share losses to provide further protection against potential credit losses.
The FDIC estimates SVB's failure will cost a federal deposit insurance fund about US$20 billion.
"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 DBKGn.DE, which had slumped 8.5 per cent on Friday alongside a sharp jump in the cost of insuring its bonds against the risk of default, rose 4.5 per cent in early Monday trade.
A broader index of Europe's top banks rose 1.1 per cent, after sliding nearly 4 per cent 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 (US regional) banks...it's a little bit of calm before the next storm."
The collapse of SVB has sent US depositors fleeing smaller regional banks for larger cousins.
Bloomberg News reported US authorities were in early stage deliberation about expanding emergency lending facilities which could give US regional lender First Republic Bank FRC.N more time to shore up its balance sheet.
Shares in First Republic Bank FRC.N, the future of which has been at the centre of investors' concerns, jumped by more than 25 per cent in premarket trading on Monday, with peers Western Alliance Bancorp WAL.N and PacWest Bancorp PACW.O climbing 5.4 per cent and 9.2 per cent, respectively.
The Stoxx index of European bank shares .SX7P is still down more than 17 per cent and the US KBW regional bank index .KRX has lost 20 per cent, 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.
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 US Federal Reserve policymaker said yesterday 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.
On the upside, business morale in Germany, Europe's largest economy, unexpectedly rose in March despite the banking turmoil.
In the US, where flows into less risky money market funds have risen by more than US$300 billion in the past month to a record atop US$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 US$110 billion, deposits of US$56 billion and loans of US$72 billion, and expand in California. It will share further potential losses with the FDIC and the FDIC retains some US$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." — Reuters