(Reuters) – U.S. bank stocks jumped on Tuesday, recovering some ground after the failure of Silicon Valley Bank and Signature Bank triggered heavy selling by investors who were already anxious about the impact on lenders of rising interest rates.
Worries about potential contagion had also slammed bank shares in Asia and Europe as investors re-examined their risks, despite assurances from U.S. President Joe Biden and other global policymakers that the financial system is safe.
An indicator of credit risk among euro zone banks hit its highest since mid-July, while ratings agency Moody’s cut its outlook on the U.S. banking system to negative from stable “to reflect the rapid deterioration in the operating environment”.
Although the VIX (.VIX) volatility index, Wall Street’s “fear gauge”, neared six-month highs overnight, U.S. regional bank shares bounced, with First Republic Bank (FRC.N) up 52.7% a day after hitting an intraday record low of $17.53.
Banking giants Citi (C.N), Wells Fargo (WFC.N) and JP Morgan (JPM.N) were also higher.
“If we do not see any high-profile failures in the near future, then the fears would subside,” said Jack Ablin, chief investment officer at Cresset Capital.
In Europe, where some see lenders as less vulnerable, the banking index (.SX7P) first fell then recovered to rise 2.7%. It posted its biggest percentage loss for over a year on Monday.
“A critical difference between the European and U.S. systems, which will limit the impact across the Atlantic, is that European banks’ bond holdings are lower and their deposits more stable,” Moody’s said in a note.
Shares of embattled Credit Suisse (CSGN.S) slid as much as 4.5% early on after it said customer “outflows stabilized to much lower levels but had not yet reversed” in its annual report, but were up 1.2% in afternoon trading.
Asian banking stocks had extended their declines overnight, with Japanese banks hard-hit despite reassurances from the Bank of Japan said about their capital buffers.
The market gyrations showed that investor worries about potential contagion to lenders worldwide were not entirely dispelled by Biden’s assurances or emergency U.S. measures to shore up banks by giving them access to additional funding.
“This is part of the process of the knob being turned to tighten financial conditions to make sure that we are on our way to normalising a higher interest rate world,” Morgan Stanley co-president Edward Pick said on Tuesday. “But there might well be surprises, there might well be reactions.”
A furious race to reprice interest rate expectations also buffeted markets as investors bet the U.S. Federal Reserve will be reluctant to hike next week.
Traders currently see a 50% chance of no rate hike at that meeting, with rate cuts priced in for the second half of the year. Early last week, a 25 basis point hike was fully priced in, with a 70% chance seen of 50 basis points.
Short-end yields in the euro zone tumbled again as investors bet the European Central Bank would moderate its policy tightening at Thursday’s meeting, with chances of a Bank of England hike next week also seen receding.
The head of Italy’s banking association, Antonio Patuelli, told Il Corriere della Sera he hoped “the ECB will do more thinking than the already announced decision to raise rates further” following SVB’s collapse.
Yunosuke Ikeda, chief equity strategist at Nomura Securities, said the shift to much less aggressive Fed hike expectations had also tempered the outlook for an eventual pivot in Japan away from ultra-low interest rates.
Analysts say uncertainty continues to dog the financial sector. Investors are worried about the health of smaller global banks, the prospect of tighter regulation and authorities’ preference for protecting depositors before shareholders.
A wave of customers have applied to shift their accounts to large U.S. banks such as JPMorgan Chase (JPM.N) and Citigroup (C.N) from smaller lenders after SVB’s demise, the Financial Times reported.
Biden said on Monday his administration’s emergency measures meant Americans could be confident the U.S. banking system is “safe”, while also promising stiffer regulation after the biggest U.S. bank failure since the 2008 financial crisis.
Regulator FDIC had moved swiftly to close New York’s Signature Bank SBNY.O as well as taking control of SVB.
The Republican head of the U.S. House Financial Services Committee also sought to shore up support for the banking system, saying on Tuesday that both the FDIC and the Fed had acted within the law. He said he still planned to hold a hearing and review documents, although no date was announced.
As markets adjusted to the impact of SVB’s collapse, the Wall Street Journal reported on Tuesday that the tech-focused lender was being investigated by the U.S. Department of Justice and the Securities and Exchange Commission (SEC).
Citing people familiar with the matter, the WSJ said the investigators are also examining stock sales that SVB Financial Group’s executives made days before SVB failed, adding that the Justice Department’s probe involves the department’s fraud prosecutors in Washington and San Francisco.
The SEC and a spokesperson for the Justice Department in Washington declined to comment. SVB did not immediately respond to a Reuters request for comment.
Apollo Global Management Inc (APO.N), Blackstone Inc (BX.N), and KKR & Co Inc (KKR.N) have expressed interest in a book of loans held by SVB, Bloomberg News reported on Tuesday, citing people familiar with the matter.
The portfolio is seen as an attractive buy and was not a contributing factor in run that caused SVB’s demise, it added.