Bank stocks around the world plunged on Monday even as President Joe Biden vowed to take whatever action was needed to ensure the safety of the U.S. banking system, after the sudden collapse of Silicon Valley Bank and Signature Bank.
Biden's efforts to reassure markets and depositors came after emergency measures by the United States to guarantee deposits at both banks failed to dispel investor worries about potential contagion to other lenders worldwide.
Major U.S. banks lost more than $70 billion in stock market value on Monday, bringing their total loss over the past three days to about $170 billion.
Shares in First Republic Bank tumbled by as much as 76.6 per cent despite news it had secured fresh financing, while Western Alliance Bancorp and PacWest Bancorp fell by 82.5 per cent and 53 per cent, respectively. Trading in the stocks was halted several times due to volatility.
First Republic had been able to meet withdrawal demands on Monday with the help of extra funding from JP Morgan Chase, the mid-cap lender's Executive Chair Jim Herbert told CNBC, adding that it was not seeing a massive deposit outflow.
Shockwaves were also felt in Europe, where the STOXX banking index closed 5.7 per cent lower. Germany's Commerzbank fell 12.7 per cent%, while Credit Suisse slid 9.6 per cent to a new record low.
Swiss financial regulator FINMA said it was closely monitoring banks and insurers, while a senior European Central Bank supervisor said the board overseeing the euro zone's biggest banks did not see any need for an emergency meeting.
Biden said his administration's actions over the weekend meant "Americans can have confidence that the banking system is safe", while also promising stiffer regulation after the biggest U.S. bank failure since the 2008 financial crisis.
"Your deposits will be there when you need them," he said.
Shares in U.S. banking giants JP Morgan Chase, Morgan Stanley and Bank of America nevertheless weakened.
An administration official said there was no timeline for Biden to make any requests of Congress as his aides were still working to manage the immediate situation and better understand what caused the crisis, and what to ask of lawmakers.
In the money markets, indicators of credit risk in the U.S. and euro zone banking systems edged up. Europe's volatility index jumped to its highest level since October 2022.
"When a step (is taken) this big, this quickly, your first thought is 'crisis averted'. But your second thought is, how big was that crisis, how big were the risks that this step had to be taken?" said Rick Meckler, partner at Cherry Lane Investments.
Emboldened by bets that the U.S. Federal Reserve may have to slow its rate hikes, and with investors seeking safe havens, the price of gold raced towards the key $1,900 level.
"There is a sense of contagion and where we see a repricing around financials is leading to a repricing across markets," said Mark Dowding, chief investment officer at BlueBay Asset Management in London.
U.S. regulators stepped in on Sunday after the collapse of SVB, which had seen a run after a big bond portfolio hit.
SVB Financial Group and two top executives were sued on Monday by shareholders, who accused them of concealing how rising interest rates would leave its Silicon Valley Bank unit, "particularly susceptible" to a bank run.
The proposed class action against SVB, Chief Executive Greg Becker and Chief Financial Officer Daniel Beck was filed in the federal court in San Jose, California.
SVB's customers will have access to all their deposits from Monday and regulators set up a new facility to give banks access to emergency funds and the Federal Reserve made it easier for banks to borrow from it in emergencies
Regulators also moved swiftly to close New York's Signature Bank, which had come under pressure in recent days.
"A serious investigation needs to be undertaken on why the regulators missed red flags ... and what needs to be overhauled," said Mark Sobel, a former senior Treasury official and U.S. chair of think tank OMFIF.
Companies around the globe with SVB accounts rushed to assess the impact on their finances, while in Germany, the central bank convened its crisis team to assess any fallout.
And after marathon weekend talks, HSBC said it was buying the British arm of SVB for one pound ($1.21).
While SVB UK is small, its sudden demised prompted calls for government help for Britain's start-up industry, and its heavily exposed biotech sector in particular.
Prime Minister Rishi Sunak added his voice to those in the UK saying there was no concern about systemic risk.
"Our banks are well capitalised, the liquidity is strong," Sunak told ITV during a visit to the United States.
A furious race to re-price interest rate expectations also sent waves through markets as investors bet the Fed 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.
Two-year U.S. Treasury yields were last down 55 bps at around 4.09% set for their biggest one day fall since 1987, according to Refinitiv data.
SVB's collapse comes alongside the closure of crypto-focused bank Silvergate, which last week disclosed plans to wind down operations and voluntarily liquidate, in the aftermath of FTX's implosion last year.
"The events unfolding are testing the post-crisis regulatory set-up," said Marco Troiano, Head of Financial Institutions Ratings at Scope Ratings.
"The only contagion threat I can see is if investors started to think that despite all the constraints banks have been subjected to post-GFC (global financial crisis), they are not the low risk business we thought they had become."