Silicon Valley Bank Collapse Sparks Global Banking Concerns
Silicon Valley Bank's collapse has sent shockwaves through the global banking industry, leading to widespread concerns about the financial stability of lenders. Despite reassurances from US President Joe Biden and other policymakers, investors remain worried about the contagion risk after two US banks collapsed.
- An indicator of credit risk in the euro area banking system has soared to its highest level since mid-July, compounded by investor concerns about the impact of rising interest rates on the banking sector
- Biden's attempts to shore up banks through emergency funding measures have failed to alleviate these concerns
Chief equity strategist at Barrenjoey, Damien Boey, warns that bank runs have started and interbank markets have become stressed. He believes that liquidity measures should have stopped these dynamics, but Main Street has been watching news and queues rather than financial plumbing.
What About The Yield?
The market has also witnessed a furious race to reprice interest rate expectations, with investors betting that the US Federal Reserve will be reluctant to hike next week. Traders currently see a 50% chance of no rate hike at the upcoming meeting, with rate cuts priced in for the second half of the year.
- Prior to the bank's collapse, investors had expected the central bank to increase rates by 50 basis points at its upcoming meeting on March 21 and 22
- However, some economists now speculate that rate hikes may be put on hold or limited to a smaller increase, such as the 2 basis point hike announced at the last meeting
- In a recent statement, Fed Chairman Jerome Powell suggested that rates could remain higher for longer depending on economic data readings, adding to the uncertainty surrounding the bank's collapse and its potential impact on the broader economy
Economists surveyed by Dow Jones predicted a 0.4% monthly increase in the consumer price index for February, with core inflation expected to increase by 0.4% from January.
The Financial Times reports that a wave of customers has applied to shift their accounts to large US banks such as JPMorgan Chase and Citigroup from smaller lenders following SVB's collapse.
- Major US banks have lost around $90 billion in stock market value, with regional lenders being hit the hardest
- Shares of First Republic Bank have plunged more than 60% as investors remain unconvinced by fresh financing
Despite Biden's promises that the US banking system is safe, investors are still worried about the stability of the banking sector, and there are concerns about potential contagion to other lenders worldwide.
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.
Photo by Hardik Pandya on Unsplash.